ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

Commission file number: 000-33063

SIERRA BANCORP

(Exact name of registrant as specified in its charter)

California

33-0937517

(State of incorporation)

(I.R.S. Employer Identification Number)

86 North Main Street, Porterville, California 93257

(Address of principal executive offices) (Zip Code)

(559) 782-4900

Registrants telephone number, including area code

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, No Par Value

The NASDAQ Stock Market LLC

(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. ¨ Yes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. ¨ Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. þ Yes ¨ No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). ¨ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨

Accelerated filer þ

Non-accelerated filer ¨

Smaller Reporting Company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). ¨ Yes þ No

As of June 30, 2010, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $95 million, based on the closing price reported to the registrant on that date of $11.50 per share. Shares of Common Stock held by each officer and director and each person or control group owning more than ten percent
of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of Common Stock of the registrant outstanding as of January 31, 2011 was 13,976,941.

Documents Incorporated by Reference: Portions of the definitive proxy statement for the 2011 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated by reference in Part III, Items 10-14.

Sierra Bancorp (the
Company), headquartered in Porterville, California, is a California corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company was incorporated in November 2000 and acquired all
of the outstanding shares of Bank of the Sierra (the Bank) in August 2001. The Companys principal subsidiary is the Bank, and the Company exists primarily for the purpose of holding the stock of the Bank and of such other
subsidiaries it may acquire or establish. The Companys main source of revenue is dividends paid by the Bank, but we may explore supplemental sources of income in the future. The expenditures of the Company, including but not limited to the
cost of servicing debt, audit costs, shareholder expenses, and the payment of dividends to shareholders, if and when declared by our Board of Directors, are paid from cash on hand at the holding company or from dividends remitted to the Company by
the Bank.

At the present time, the Companys only other direct subsidiaries are Sierra Statutory Trust II and Sierra Capital Trust III,
which were formed in March 2004 and June 2006, respectively, solely to facilitate the issuance of capital trust pass-through securities (TRUPS). Pursuant to the Financial Accounting Standards Boards (FASBs) standard on the
consolidation of variable interest entities, these trusts are not reflected on a consolidated basis in the financial statements of the Company. References herein to the Company include Sierra Bancorp and its consolidated subsidiary, the
Bank, unless the context indicates otherwise.

At December 31, 2010, the Company had consolidated assets of $1.287 billion, gross loans
of $806 million, deposits of $1.052 billion and shareholders equity of $160 million. The Companys liabilities include $31 million in debt obligations due to Sierra Statutory Trust II and Sierra Capital Trust III, related to TRUPS issued
by those entities.

The Bank

The Bank is a California state-chartered bank headquartered in Porterville, California, that offers a full range of retail and commercial banking services
to communities in the central and southern sections of the San Joaquin Valley. Our branch footprint stretches from Fresno on the north to Bakersfield on the south, and on the southern end extends east through the Tehachapi plateau and into the
northwestern tip of the Mojave Desert. The Bank was incorporated in September 1977 and opened for business in January 1978, and in the ensuing years has grown to be the largest independent bank headquartered in the South San Joaquin Valley. Our
growth has primarily been organic, but includes the acquisition of Sierra National Bank in 2000.

We currently operate 25 full service branch
offices throughout our geographic footprint, as well as an internet branch which provides the ability to open deposit accounts and submit certain loan applications online. The Banks newest brick and mortar branches opened for
business in Selma in February 2011 and Farmersville in March 2010. In January 2011 we closed our first branch ever, in Bakersfield on California Avenue, due to lease issues. The locations of the Banks current offices are:

In addition to our full-service branches, the Bank has an agricultural credit unit with staff located at our
corporate headquarters, which provides a complete line of credit services in support of the agricultural activities that are key to the economies of the communities we serve. Ag lending clients include a full range of individual farming customers,
small business farming organizations, and major corporate farming units. We also actively engage in Small Business Administration (SBA) lending, and a specialized SBA lending unit is also housed at corporate headquarters. We have been designated as
an SBA Preferred Lender since 1999.

The Banks gross loan and lease balances totaled $806 million at the end of 2010. The Banks
lending activities include real estate, commercial (including small business), agricultural, and consumer loans. The bulk of our real estate loans are secured by commercial or professional office properties which are predominantly owner-occupied. We
also employ real estate lending specialists who are responsible for a complete line of land acquisition and development loans, construction loans for residential and commercial development, permanent mortgage loans, and multifamily credit
facilities. Secondary market services are provided through the Banks affiliations with Freddie Mac, Fannie Mae and various non-governmental programs.

As of December 31, 2010, the percentage of our total loan and lease portfolio for each of the principal areas in which we directed our lending activities was as follows: (i) loans secured by
real estate (77.3%); (ii) commercial and industrial loans (including SBA loans) (14.2%); (iii) consumer loans (5.7%); (iv) direct finance leases (1.3%); and (v) agricultural production loans (1.5%). Real estate loans and related
activities generated total revenue of $40.8 million in 2010 and $44.3 million in 2009. Interest, fees, and loan sale income on real-estate secured loans totaled approximately 50% of our total interest and other income for 2010 and 51% in 2009.

In addition to loans, we offer a wide range of deposit products for retail and business banking markets
including checking accounts, savings accounts (including money market demand accounts), time deposits, retirement accounts, and sweep accounts. The Banks deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to
maximum insurable amounts. We have also been in the CDARS network since its inception, and through CDARS are able to offer full FDIC insurance coverage to depositors with balances of up to $50 million. We attract deposits from throughout our market
area with direct-mail campaigns, a customer-oriented product mix, competitive pricing, convenient locations, and drive-up banking, and we strive to retain our deposit customers by providing a consistently high level of service and soliciting
customer feedback. At December 31, 2010 we had 85,379 deposit accounts totaling $1.052 billion, compared to 79,550 deposit accounts totaling $1.125 billion at December 31, 2009.

We offer a multitude of other products and services to complement our lending and deposit services. These include cashiers checks, travelers checks, gift cards, bank-by-mail, night depository,
safe deposit boxes, direct deposit, automated payroll services, electronic funds transfers, online banking, ATMs, and other customary banking services. In addition to onsite ATMs at all of our branches, we operate our own offsite ATMs at eight
different non-branch locations. Furthermore, the Bank is a member of the Allpoint network, which provides our customers with surcharge-free access to over 35,000 ATMs across the nation, including 4,600 in California. Our customers also have access
to electronic point-of-sale payment alternatives nationwide, via the Pulse EFT network. Internet banking, including optional bill-pay functionality and mobile banking capabilities (via cell phones and other mobile devices), had close to 29,000
individual and business users as of the end of 2010. Retail customers who prefer access channels other than traditional branches also have the ability to open Bank of the Sierra deposit accounts online, and business customers have the option of
utilizing remote deposit capture capabilities to send their check deposits to us electronically. Furthermore, to ensure that the personal banking preferences of all customers are addressed, we operate a telephone banking system that is accessible 24
hours a day seven days a week, and we have a customer service group accessible by toll-free telephone.

To provide non-deposit investment
options we have a strategic alliance with Investment Centers of America, Inc. of Bismarck, North Dakota (ICA). Through this arrangement, registered and licensed representatives of ICA provide our customers with convenient access to
annuities, insurance products, mutual funds, and a full range of investment products. They conduct business from offices located in our Porterville, Visalia, Tulare, Fresno, Bakersfield and Tehachapi branches.

We have not engaged in any material research activities related to the development of new products or services during the last two fiscal years. However,
our officers and employees are continually searching for ways to increase public convenience, enhance public access to the electronic payments system, and enable us to improve our competitive position. The cost to the Bank for these development,
operations, and marketing activities cannot be calculated with any degree of certainty.

We hold no patents or licenses (other than licenses
required by appropriate bank regulatory agencies), franchises, or concessions. Our business has a modest seasonal component due to the heavy agricultural orientation of the Central Valley. As our branches in more metropolitan areas such as Fresno
and Bakersfield have expanded, however, we have become less reliant on the agriculture-related base. We are not dependent on a single customer or group of related customers for a material portion of our core deposits, nor is a material portion of
our loans concentrated within a single industry or group of related industries. Our efforts to comply with government and regulatory mandates on consumer protection and privacy, anti-terrorism, and other initiatives have resulted in significant
ongoing expense to the Bank, including staffing additions and costs associated with compliance-related software. However, as far as can be determined there has been no material effect upon our capital expenditures, earnings, or competitive position
as a result of environmental regulation at the Federal, state, or local level.

Recent Developments

On October 19, 2010, Sierra Bancorp sold 2,325,000 shares of its common stock at a price of $10 per share, in a registered direct offering to select
institutional investors. The shares were sold pursuant to the Companys $100 million shelf registration that became effective on July 28, 2010. The aggregate proceeds totaled $23.3 million, while net proceeds from the offering, after
placement fees and other transaction expenses, were approximately $22.0 million.

Proceeds are available for general corporate purposes, as described in the Companys Prospectus Supplement concerning the offering filed with the SEC on October 14, 2010 pursuant to
Rule 424(b)(5).

Recent Accounting Pronouncements

Information on recent accounting pronouncements is contained in Footnote 2 to the Financial Statements.

Competition

The banking business in California in general, and specifically in many
of our market areas, is highly competitive with respect to virtually all products and services. The industry continues to consolidate, particularly with the relatively large number of recent FDIC-assisted takeovers of failed banks. There are also
many unregulated companies competing for business in our markets with financial products targeted at highly profitable customer segments. Many of these competitors are able to compete across geographic boundaries, and provide customers with
meaningful alternatives to nearly all significant banking services and products. These competitive trends are likely to continue.

With
respect to commercial bank competitors, the business is dominated by a relatively small number of major banks that operate a large number of offices within our geographic footprint. Based on June 30, 2010 FDIC market share data for the combined
four counties within which the Company operates, namely Tulare, Kern, Fresno, and Kings counties, the top four institutions are multi-billion dollar entities with an aggregate of 142 offices that control 52.8% of deposit market share. The largest
portion of deposits in the combined four-county area was with Bank of America (22.0%), followed by Wells Fargo (18.7%), Union Bank of California (6.4%), and J.P. Morgan Chase (5.6%). Bank of the Sierra ranks fifth on the 2010 market share list with
5.3% of total deposits in the referenced four-county area. In Tulare County, however, where the Bank was originally formed, we rank first for total number of branch locations (12, including our online branch), and first for deposit market share with
20.1% of total deposits. The larger banks noted above have, among other advantages, the ability to finance wide-ranging advertising campaigns and to allocate their resources to regions of highest yield and demand. They can also offer certain
services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, these banks also have substantially higher lending limits than we do. For customers whose needs
exceed our legal lending limit, we typically arrange for the sale, or participation, of some of the balances to financial institutions that are not within our geographic footprint.

In addition to other banks, our competitors include savings institutions, credit unions, and numerous non-banking institutions such as finance companies,
leasing companies, insurance companies, brokerage firms, and investment banking firms. We have also witnessed increased competition from specialized companies that offer wholesale finance, credit card, and other consumer finance services, as well as
services that circumvent the banking system by facilitating payments via the internet, wireless devices, prepaid cards, or other means. Technological innovations have lowered traditional barriers of entry and enabled many of these companies to
compete in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products. Many
customers now expect a choice of delivery channels, including telephone, mail, internet, ATMs, self-service branches, and/or in-store branches. These products are offered by traditional banks and savings associations, as well as credit unions,
brokerage firms, asset management groups, finance and insurance companies, internet-based companies, and mortgage banking firms.

Strong
competition for deposits and loans among financial institutions and non-banks alike affects interest rates and other terms on which financial products are offered to customers. Mergers between financial institutions have placed additional pressure
on other banks within the industry to remain competitive by streamlining operations, reducing expenses, and increasing revenues. Competition has also intensified due to federal and state interstate banking laws enacted in the mid-1990s, which
permit banking organizations to expand into other states. The relatively large California market has been particularly attractive to out-of-state institutions. The Financial Modernization Act, enacted in 2000, has made it possible for full
affiliations to occur between banks and securities firms, insurance companies, and other financial companies, which has further intensified competitive conditions.

For years we have countered rising competition by offering a broad array of products, with accommodative
policies that allow flexibility in structure and term that cannot always be matched by our competitors. We also offer our customers community-oriented, personalized service, and rely on local promotional activity and personal contacts by our
officers, directors, employees, and shareholders. This approach appears to be well-received by the populace of the San Joaquin Valley, who appreciate a high-touch, customer-oriented environment in which to conduct their financial transactions.
Layered onto our traditional personal-contact banking philosophy are telephone banking, internet banking, online bill payment and cash management capabilities, which were initiated to meet the needs of customers with electronic access requirements
and provide automated 24-hour banking. This high-tech and high-touch approach allows individuals to customize access to the Bank to their particular preference.

Employees

As of December 31, 2010 the Company had 318 full-time and 90
part-time employees. On a full time equivalent basis staffing stood at 390 at December 31, 2010, down from 402 at December 31, 2009.

Regulation and Supervision

Banks
and bank holding companies are heavily regulated by federal and state laws. Most banking regulations are intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders. The following is a
summary of certain statutes, regulations and regulatory guidance affecting the Company and the Bank. This summary is not intended to be a complete explanation of such statutes, regulations and guidance and their effects on the Company and the Bank
and is qualified in its entirety by such statutes, regulations and guidance, all of which are subject to change in the future.

Regulation
of the Company Generally

The Companys stock is traded on the NASDAQ Global Select Market under the symbol BSRR, and as such the
Company is subject to NASDAQ rules and regulations including those related to corporate governance. The Company is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of 1934 (the Exchange
Act) which requires the Company to file annual, quarterly and other current reports with the Securities and Exchange Commission (the SEC). The Company is subject to additional regulations including, but not limited to, the proxy
and tender offer rules promulgated by the SEC under Sections 13 and 14 of the Exchange Act; the reporting requirements of directors, executive officers and principal shareholders regarding transactions in the Companys common stock, and
short-swing profits rules promulgated by the SEC, under Section 16 of the Exchange Act; and certain additional reporting requirements for principal shareholders of the Company promulgated by the SEC under Section 13 of the Exchange Act. As
a publicly traded company which had more than $75 million in public float as of June 30, 2010, the Company is classified as an accelerated filer for purposes of its Exchange Act filing requirements. In addition to accelerated time
frames for filing SEC periodic reports, this also means that the Company is subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 with regard to documenting, testing, and attesting to internal controls over financial
reporting.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 and is registered as such with
the Federal Reserve Board. A bank holding company is required to file with the Federal Reserve annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to periodic examination by the
Federal Reserve and is required to obtain Federal Reserve approval before acquiring, directly or indirectly, ownership of the voting shares of any bank if, after such acquisition, it would directly or indirectly own or control more than 5% of the
voting stock of that bank, unless it already owns a majority of the voting stock of that bank.

The Federal Reserve Board has determined by
regulation certain activities in which a bank holding company may or may not conduct business. A bank holding company must engage, with certain exceptions, in the business of banking or managing or controlling banks or furnishing services to or
performing services for its subsidiary banks. The principal exceptions to these prohibitions involve non-bank activities identified by statute, by Federal Reserve regulation, or by Federal Reserve order as activities so closely related to the
business of banking or of managing or

controlling banks as to be a proper incident thereto, including securities brokerage services, investment advisory services, fiduciary services, and management advisory and data processing
services, among others. A bank holding company that also qualifies as and elects to become a financial holding company may engage in a broader range of activities that are financial in nature (and complementary to such activities),
specifically non-bank activities identified by the Gramm-Leach-Bliley Act of 1999 or by Federal Reserve and Treasury regulation as financial in nature or incidental to a financial activity. Activities that are defined as financial in nature include
securities underwriting, dealing, and market making, sponsoring mutual funds and investment companies, engaging in insurance underwriting and agency activities, and making merchant banking investments in non-financial companies. To become and remain
a financial holding company, a bank holding company and its subsidiary banks must be well capitalized, well managed, and, except in limited circumstances, have at least a satisfactory rating under the Community Reinvestment Act. The Company has no
current intention of becoming a financial holding company, but may do so at some point in the future if deemed appropriate in view of opportunities or circumstances at the time.

The Company and the Bank are deemed to be affiliates of each other within the meaning set forth in the Federal Reserve Act and are subject to Sections 23A and 23B of the Federal Reserve Act. The Federal
Reserve Board has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. This means, for example, that there are
limitations on loans by the Bank to affiliates, and that all affiliate transactions must satisfy certain limitations and otherwise be on terms and conditions at least as favorable to the Bank as would be available for non-affiliates. In addition, we
must comply with the Federal Reserve Act and Regulation O issued by the Federal Reserve Board, which require that loans and extensions of credit to our executive officers, directors and principal shareholders, or any company controlled by any such
persons, shall, among other conditions, be made on substantially the same terms and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders.

Regulations and policies of the Federal Reserve Board require a bank holding company to serve as a source of financial and managerial strength to its
subsidiary banks. It is the Federal Reserve Boards policy that a bank holding company should stand ready to use available resources to provide adequate capital funds to a subsidiary bank during periods of financial stress or adversity and
should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting a subsidiary bank. Under certain conditions, the Federal Reserve Board may conclude that certain actions of a bank holding company,
such as a payment of a cash dividend, would constitute an unsafe and unsound banking practice. The Federal Reserve Board also has the authority to regulate bank holding companies debt, including the authority to impose interest rate ceilings
and reserve requirements on such debt. Under certain circumstances, the Federal Reserve Board may require a bank holding company to file written notice and obtain its approval prior to purchasing or redeeming its equity securities, unless certain
conditions are met.

Regulation of the Bank Generally

As a California state-chartered bank whose accounts are insured by the FDIC up to the maximum limits allowable by law, the Bank is subject to regulation, supervision and regular examination by the
California Department of Financial Institutions (the DFI) and the FDIC. In addition, while the Bank is not a member of the Federal Reserve System, the Bank is subject to certain regulations of the Federal Reserve Board. The regulations
of these agencies govern most aspects of the Banks business, including the making of periodic reports by the Bank, and the Banks activities relating to dividends, investments, loans, borrowings, capital requirements, certain
check-clearing activities, branching, mergers and acquisitions, reserves against deposits and numerous other areas. Supervision, legal action and examination by the FDIC are generally intended to protect depositors and are not intended for the
protection of shareholders.

The earnings and growth of the Bank are largely dependent on our ability to maintain a favorable differential, or
spread, between our yield on interest-earning assets and the average rate paid on our deposits and other interest-bearing liabilities. As a result, the Banks performance is influenced by general economic conditions, both domestic
and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (such as, for example,
seeking to curb inflation and combat recession) by its open-market operations in United States government

securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by banks that
participate in the Federal Reserve System. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates on loans and deposits. The nature and impact of any future
changes in monetary policies cannot be predicted with any degree of certainty.

Capital Adequacy Requirements

The Company and the Bank are subject to the regulations of the Federal Reserve Board and the FDIC, respectively, governing capital adequacy. Each of the
federal regulators has established risk-based and leverage capital guidelines for the banks and/or bank holding companies it regulates, which set total capital requirements and define capital in terms of core capital elements, or Tier 1
capital; and supplemental capital elements, or Tier 2 capital. Tier 1 capital is generally defined as the sum of the core capital elements less goodwill and certain other deductions, including the unrealized net gains or losses (after
tax adjustments) on investment securities available for sale carried at fair market value and disallowed deferred tax assets. The following items are defined as core capital elements: (i) common shareholders equity; (ii) qualifying
non-cumulative perpetual preferred stock and related surplus (and, in the case of holding companies, senior perpetual preferred stock issued to the U.S. Treasury Department pursuant to the Troubled Asset Relief Program); (iii) minority
interests in the equity accounts of consolidated subsidiaries; and (iv) qualifying trust preferred securities up to a specified limit as discussed below. Supplementary capital elements include: (i) allowance for loan and lease losses (but
not more than 1.25% of an institutions risk-weighted assets); (ii) perpetual preferred stock and related surplus not qualifying as core capital; (iii) hybrid capital instruments, perpetual debt and mandatory convertible debt
instruments; and, (iv) term subordinated debt and intermediate-term preferred stock and related surplus. The maximum amount of supplemental capital elements, which qualify as Tier 2 capital, is limited to 100% of Tier 1 capital.

In March 2005, the Federal Reserve Board adopted a final rule allowing bank holding companies to continue to include trust preferred securities in their
Tier 1 capital. The amount that can be included is limited to 25% of core capital elements, net of goodwill less any associated deferred tax liability. As of December 31, 2010, TRUPS made up approximately 17% of the Companys Tier 1
capital. In addition, since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act the Company can continue to include its TRUPS in Tier 1 capital to the extent permitted by FRB guidelines. See
Dodd-Frank Wall Street Reform and Consumer Protection Act below.

The minimum required ratio of qualifying total capital to total
risk-weighted assets is 8% (Total Risk-Based Capital Ratio), at least one-half of which must be in the form of Tier 1 capital, and the minimum required ratio of Tier 1 capital to total risk-weighted assets is 4% (Tier 1 Risk-Based
Capital Ratio). Risk-based capital ratios are calculated to provide a measure of capital relative to the degree of risk associated with a financial institutions operations for transactions reported on the balance sheet as assets, and
transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under risk-based capital guidelines, the nominal dollar amounts of assets and credit-equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as cash on hand and certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as unsecured loans.
As of December 31, 2010 and 2009, Bank-only Total Risk-Based Capital Ratios were 19.31% and 16.04%, respectively, and the Banks Tier 1 Risk-Based Capital Ratios were 18.04% and 14.78%, respectively. As of December 31, 2010 and
2009, the consolidated Companys Total Risk-Based Capital Ratios were 20.33% and 16.67%, respectively, and its Tier 1 Risk-Based Capital Ratios were 19.06% and 15.41%, respectively.

The FDIC and the Federal Reserve Board have also established guidelines for a financial institutions leverage ratio, defined as Tier 1 capital to adjusted total assets. Banks and bank holding
companies that have received the highest rating of the five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a leverage ratio of at least 3%. All other institutions are
typically required to maintain a leverage ratio of at least 4% to 5%; however, federal regulations also provide that financial institutions must maintain capital levels commensurate with the level of risk to which they are exposed, including the
volume and severity of problem loans, and federal regulators may set higher capital requirements when an institutions particular

circumstances warrant. Bank-only leverage ratios were 13.07% and 11.44% on December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, the consolidated Companys
leverage ratios were 13.84% and 11.91%, respectively.

Risk-based capital requirements also take into account concentrations of credit
involving collateral or loan type, and the risks of non-traditional activities (those that have not customarily been part of the banking business). The regulations require institutions with high or inordinate levels of risk to operate
with higher minimum capital standards, and authorize the regulators to review an institutions management of such risks in assessing an institutions capital adequacy. Additionally, the regulatory Statements of Policy on risk-based capital
include exposure to interest rate risk as a factor that the regulators will consider in evaluating a financial institutions capital adequacy, although interest rate risk does not impact the calculation of an institutions risk-based
capital ratios. Interest rate risk is the exposure of a banks current and future earnings and equity capital to adverse movement in interest rates. While interest rate risk is inherent in a financial institutions role as a financial
intermediary, it introduces volatility to the institutions earnings and economic value.

For more information on the Companys
capital, see Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation  Capital Resources. Risk-based capital ratio requirements are discussed in greater detail in the following section.

Prompt Corrective Action Provisions

Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured financial institutions, including but not limited to those that fall below one or more
prescribed minimum capital ratios. The federal banking agencies have by regulation defined the following five capital categories: well capitalized (Total Risk-Based Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and
Leverage Ratio of 5%); adequately capitalized (Total Risk-Based Capital Ratio of 8%; Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%, or 3% if the institution receives the highest rating from its primary regulator);
undercapitalized (Total Risk-Based Capital Ratio of less than 8%; Tier 1 Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of less than 4%, or 3% if the institution receives the highest rating from its primary regulator);
significantly undercapitalized (Total Risk-Based Capital Ratio of less than 6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Ratio less than 3%); and critically undercapitalized (tangible equity to total
assets less than 2%). As of December 31, 2010 and 2009, both the Company and the Bank were deemed to be well capitalized for regulatory capital purposes. A bank may be treated as though it were in the next lower capital category if, after
notice and the opportunity for a hearing, the appropriate federal agency finds an unsafe or unsound condition or practice so warrants, but no bank may be treated as critically undercapitalized unless its actual capital ratio warrants
such treatment.

At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For
example, a bank is generally prohibited from paying management fees to any controlling persons or from making capital distributions if to do so would make the bank undercapitalized. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any). Significantly undercapitalized banks are subject to
broad regulatory authority, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits, restrictions on asset growth and activities, and prohibitions on paying bonuses or
increasing compensation to senior executive officers without FDIC approval. Even more severe restrictions apply to critically undercapitalized banks. Most importantly, except under limited circumstances, not later than 90 days after an
insured bank becomes critically undercapitalized the appropriate federal banking agency is required to appoint a conservator or receiver for the bank.

In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the issuance of cease and desist orders, termination of insurance
of deposits (in the

case of a bank), the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against
institution-affiliated parties.

Safety and Soundness Standards

The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository institutions. Those guidelines relate to internal controls, information
systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet the requisite standards, the appropriate federal banking agency may require the institution to submit a compliance plan and could institute enforcement proceedings if an
acceptable compliance plan is not submitted or adhered to.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was enacted in July 2010, and is expected to have a broad impact
on the financial services industry, including significant regulatory and compliance changes. The provisions of Dodd-Frank most relevant to the Company and the banking industry in general are outlined in this section.

Dodd-Frank excludes trust preferred securities from Tier I capital calculations, although it grandfathers trust preferred securities issued before
May 19, 2010 by bank holding companies with less than $15 billion in total assets. The Companys trust-preferred securities were issued prior to that date, so they remain eligible for inclusion in Tier 1 capital. Another provision of
Dodd-Frank eliminates the current restriction on the payment of interest on business demand deposit accounts, effective one year after the date of enactment. Dodd-Frank also adopted the so-called Volcker rule, which, subject to certain
exceptions, prohibits any banking entity from engaging in proprietary trading, or sponsoring or investing in a hedge fund or private equity fund. In addition, it establishes a framework for the regulators to liquidate large institutions that pose
systemic risks.

Other key provisions in Dodd-Frank change the assessment base for deposit insurance premiums, revise the designated reserve
ratio (DRR) for the FDICs Deposit Insurance Fund, and increase the level of deposit insurance per depositor. The assessment base has historically consisted of an institutions total domestic deposits, but commencing in the
second quarter of 2011 it changes to average consolidated total assets minus average tangible equity. The result is that larger financial institutions, which typically have a greater proportion of assets funded by non-deposit liabilities, will pay a
greater percentage of the aggregate insurance assessment and smaller banks will pay proportionately less. Changes to the DRR include the following: the minimum was raised to 1.35% from 1.15%, with the burden of the increase to be assessed to
financial institutions with assets greater than $10 billion; a deadline of September 30, 2020 was established for reaching the 1.35% minimum ratio; the 1.50% upper limit was removed, effectively eliminating a cap on the size of the fund; and,
the requirement to pay dividends when the reserve ratio exceeds 1.35% was eliminated, but gives the FDIC discretionary authority to pay dividends when the reserve ratio exceeds 1.50%. Dodd-Frank also provides for a permanent increase in FDIC deposit
insurance per depositor from $100,000 to $250,000 retroactive to January 1, 2008, and extends unlimited deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2012.

Dodd-Frank has a number of provisions intended to protect investors, including risk retention requirements for certain asset-backed securities, reforms
to the regulation of credit rating agencies, and the establishment of an Investor Advisory Committee and an Office of Investor Advocate. It also provides a number of changes to corporate governance procedures for public companies, including proxy
access requirements for shareholders, non-binding shareholder votes on executive compensation, the establishment of an independent compensation committee, and executive compensation disclosures and compensation claw-backs. The Federal Reserve is
also required to issue regulations regarding incentive-based pay practices for institutions with more than $1 billion in assets.

Dodd-Frank
also establishes the Bureau of Consumer Financial Protection, an independent entity housed within the Federal Reserve. It gives the Bureau the authority to prohibit practices that it finds to be unfair, deceptive, or

abusive, and expands certain disclosure requirements. Furthermore, the Durbin Amendment to Dodd-Frank limits interchange fees for debit card transactions to an amount established as
reasonable under regulations to be issued by the Federal Reserve. Cards issued by banks with less than $10 billion in assets are exempt from this requirement, although this exemption has been criticized as being ineffective because
smaller banks will have to match the rates being offered by their larger competitors.

The Mortgage Reform and Anti-Predatory Lending Act is
another important provision of Dodd-Frank for community banks. It places new regulations on mortgage originators and imposes new disclosure requirements and appraisal reforms, the most important of which are: the creation of a mortgage originator
duty of care; the establishment of certain underwriting requirements so that, at the time of origination, the consumer has a reasonable ability to repay the loan; the creation of documentation requirements intended to eliminate no
document and low document loans; the prohibition of steering incentives for mortgage originators; a prohibition on yield spread premiums and prepayment penalties in many cases; and, a provision that allows borrowers to assert as a
foreclosure defense a contention that the lender violated the anti-steering restrictions or reasonable repayment requirements.

The Company is currently evaluating the potential impact the Dodd-Frank Act will have on its business, financial condition, results of operations and
prospects, and expects that some provisions of Dodd-Frank may have adverse effects on the Company, including the cost of complying with the numerous new regulations and reporting requirements. Many aspects of Dodd-Frank are subject to rulemaking and
will take effect over several years, making it difficult to project the overall financial impact on the Company and the financial services industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment
of interest on demand deposits could increase the costs associated with deposits.

The Emergency Economic Stabilization Act of 2008 and the
Troubled Asset Relief Program

In response to the market turmoil and financial crises affecting the overall banking system and financial
markets in the United States, the Emergency Economic Stabilization Act of 2008 (EESA) was enacted in October 2008. In February 2009, the American Recovery and Reinvestment Act of 2009 (the Stimulus Bill) was enacted, which
among other things augmented certain provisions of the EESA. Under the EESA, the Treasury Department has authority to purchase up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt
and equity securities issued by financial institutions in the Troubled Asset Relief Program (the TARP). The purpose of the TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to
increase lending to customers and to each other.

The Treasury Department allocated $250 billion in TARP-authorized funds to the TARP Capital
Purchase Program, which was developed to purchase senior preferred stock from qualifying financial institutions in order to strengthen their capital and liquidity positions and encourage them to increase lending to creditworthy borrowers. Qualifying
financial institutions could be approved to issue preferred stock to the Treasury Department in amounts not less than 1% of their risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets. After evaluating the
strategic advantages and operating restrictions inherent in issuing preferred shares to the U.S. government, Sierra Bancorp elected not to participate in the capital purchase element of TARP.

The EESA also established a Temporary Liquidity Guarantee Program (TLGP) that gave the FDIC the ability to provide a guarantee for newly-issued senior unsecured debt and non-interest bearing
transaction deposit accounts at eligible insured institutions. The Company is currently participating in the transaction account guarantee program. This program was initially scheduled to continue through December 31, 2010, but the Dodd-Frank
Act has extended full deposit insurance coverage for non-interest bearing transaction accounts through December 31, 2012, and all financial institutions are required to participate in this extended guarantee program. For non-interest bearing
transaction deposit accounts, a 10 basis point annual FDIC insurance premium surcharge was applied to deposit amounts in excess of $250,000 through December 31, 2009, and a risk-based surcharge of between 15 and 25 basis points was applied
beginning January 1, 2010.

The Banks deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits by the Deposit Insurance Fund (DIF) of the FDIC and are subject to deposit
insurance assessments to maintain the DIF. In October 2010, the FDIC adopted a revised restoration plan to ensure that the DIFs designated reserve ratio reaches 1.35% of insured deposits by September 30, 2020, the deadline mandated by the
Dodd-Frank Act. However, financial institutions like Bank of the Sierra with assets of less than $10 billion are required to be exempt from the cost of this increase, and the FDIC plans further rulemaking in 2011 regarding the method that will be
used to reach the requisite 1.35% minimum reserve ratio while offsetting the effect of required increases on such smaller institutions. In addition, because of lower expected losses over the next five years and the additional time provided by
Dodd-Frank to meet the minimum DRR, the FDIC eliminated the uniform 3 basis point increase in assessment rates that was previously scheduled to go into effect on January 1, 2011. Furthermore, the restoration plan proposed an increase in the DRR
to 2% of estimated insured deposits as a long-term goal for the fund. The FDIC also proposed future assessment rate reductions in lieu of dividends, when the DRR reaches 1.5% or greater.

As noted above, the Dodd-Frank Act provided for a permanent increase in FDIC deposit insurance per depositor from $100,000 to $250,000 retroactive to January 1, 2008, and extended unlimited deposit
insurance coverage for non-interest bearing transaction accounts through December 31, 2012. Furthermore, the FDIC redefined its deposit insurance premium assessment base from an institutions total domestic deposits to its total assets
less tangible equity, effective in the second quarter of 2011. The changes to the assessment base necessitated changes to assessment rates, which will become effective April 1, 2011. While revised assessment rates will be lower than current
rates, the assessment base will be larger, and the expectation is that approximately the same amount of assessment revenue will be collected by the FDIC as under the current structure.

To help address liquidity issues created by potential timing differences between the collection of premiums and charges against the DIF, in November 2009 the FDIC adopted a final rule to require insured
institutions to prepay, on December 31, 2009, their estimated quarterly risk-based deposit insurance assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Our prepaid assessment, a non-earning asset, was $4.3 million
as of December 31, 2010. Until such time as our prepaid FDIC assessment is fully utilized, our accounting offset for FDIC assessment expense is the prepaid assessment rather than cash.

In addition to DIF assessments, banks must pay quarterly assessments that are applied to the retirement of Financing Corporation bonds issued in the 1980s to assist in the recovery of the savings
and loan industry. The assessment amount fluctuates, but is currently 1.02 basis points of insured deposits. These assessments will continue until the Financing Corporation bonds mature in 2019.

Community Reinvestment Act

The Bank is
subject to certain requirements and reporting obligations involving Community Reinvestment Act (CRA) activities. The CRA generally requires federal banking agencies to evaluate the record of a financial institution in meeting the credit
needs of its local communities, including low and moderate income neighborhoods. The CRA further requires the agencies to consider a financial institutions efforts in meeting its community credit needs when evaluating applications for, among
other things, domestic branches, consummating mergers or acquisitions, or the formation of holding companies. In measuring a banks compliance with its CRA obligations, the regulators utilize a performance-based evaluation system under which
CRA ratings are determined by the banks actual lending, service, and investment performance, rather than on the extent to which the institution conducts needs assessments, documents community outreach activities or complies with other
procedural requirements. In connection with its assessment of CRA performance, the FDIC assigns a rating of outstanding, satisfactory, needs to improve or substantial noncompliance. The Bank was last
examined for CRA compliance in late 2010, although a final assessment rating from that exam has not yet been issued. The Bank received a satisfactory CRA Assessment Rating in August 2007.

The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999 (the Financial Modernization Act), imposed requirements on financial institutions with respect to consumer
privacy. The statute generally prohibits disclosure of consumer information to non-affiliated third parties unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further
required to disclose their privacy policies to consumers annually. Financial institutions, however, are required to comply with state law if it is more protective of consumer privacy than the Financial Modernization Act. The statute also directed
federal regulators, including the Federal Reserve and the FDIC, to prescribe standards for the security of consumer information.

Other
Consumer Protection Laws and Regulations

Activities of all insured banks are subject to a variety of statutes and regulations designed to
protect consumers, including the Fair Credit Reporting Act, Equal Credit Opportunity Act, and Truth-in-Lending Act. Interest and other charges collected or contracted for by the Bank are also subject to state usury laws and certain other federal
laws concerning interest rates. The Banks loan operations are also subject to federal laws and regulations applicable to credit transactions. Together, these laws and regulations include provisions that:



govern disclosures of credit terms to consumer borrowers;



require financial institutions to provide information to enable the public and public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the communities it serves;



prohibit discrimination on the basis of race, creed, or other prohibited factors in extending credit;



govern the use and provision of information to credit reporting agencies; and



govern the manner in which consumer debts may be collected by collection agencies.

The Banks deposit operations are also subject to laws and regulations that:



impose a duty to maintain the confidentiality of consumer financial records and prescribe procedures for complying with administrative subpoenas of
financial records; and



govern automatic deposits to and withdrawals from deposit accounts and customers rights and liabilities arising from the use of automated teller
machines and other electronic banking services.

In November 2009, the Board of Governors of the Federal Reserve System
promulgated a rule entitled Electronic Fund Transfers, with a mandatory compliance date of July 1, 2010. The rule, which applies to all FDIC-regulated institutions, prohibits financial institutions from assessing an overdraft fee
for paying automated teller machine (ATM) and one-time point-of-sale debit card transactions, unless the customer affirmatively opts in to the overdraft service for those types of transactions. The opt-in provision establishes requirements for clear
disclosure of fees and terms of overdraft services for ATM and one-time debit card transactions. The rule does not apply to other types of transactions, such as check, automated clearinghouse (ACH) and recurring debit card transactions.
Implementation of this rule has reduced our annual service charge income by an estimated $1 million, or 9%, all else being equal.

The Riegle Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Act) regulates the interstate activities of banks and bank holding companies and establishes a
framework for nationwide interstate banking and branching. Since 1995, adequately capitalized and managed bank holding companies have been permitted to acquire banks located in any state, subject to two exceptions: first, any state may still
prohibit bank holding companies from acquiring a bank which is less than five years old; and second, no interstate acquisition can be consummated by a bank holding company if the acquirer would control more than 10% of the deposits held by insured
depository institutions nationwide or 30% or more of the deposits held by insured depository institutions in any state in which the target bank has branches. In 1995, California enacted legislation to implement important provisions of the Interstate
Banking Act and to repeal Californias previous interstate banking laws, which were largely preempted by the Interstate Banking Act. A bank may establish and operate de novo branches in any state in which the bank does not maintain a branch if
that state has enacted legislation to expressly permit all out-of-state banks to establish branches in that state. However, California law expressly prohibits an out-of-state bank which does not already have a California branch office from
(i) purchasing a branch office of a California bank (as opposed to purchasing the entire bank) and thereby establishing a California branch office, or (ii) establishing a de novo branch in California.

The Interstate Banking Act and related California laws have increased competition in the environment in which we operate to the extent that out-of-state
financial institutions directly or indirectly enter our market areas. It appears that the Interstate Banking Act has also contributed to the accelerated consolidation of the banking industry, with many large out-of-state banks having entered the
California market as a result of this legislation.

USA Patriot Act of 2001

The impact of the USA Patriot Act of 2001 (the Patriot Act) on financial institutions of all kinds has been significant and wide ranging. The Patriot Act substantially enhanced existing
anti-money laundering and financial transparency laws, and required appropriate regulatory authorities to adopt rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering. Under the Patriot Act, financial institutions are subject to prohibitions regarding specified financial transactions and account relationships, as well as enhanced due diligence and know your
customer standards in their dealings with foreign financial institutions and foreign customers. The Patriot Act also requires all financial institutions to establish anti-money laundering programs. The Bank expanded its Bank Secrecy Act
Compliance Department and intensified due diligence procedures concerning the opening of new accounts to fulfill the anti-money laundering requirements of the Patriot Act. The Bank also implemented new systems and procedures to identify suspicious
activity reports, and reports any such activity to the Financial Crimes Enforcement Network.

Sarbanes-Oxley Act of 2002

The Company is subject to the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) which addresses, among other issues, corporate governance, auditing
and accounting, executive compensation, and enhanced and timely disclosure of corporate information. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer certifications of periodic financial reports, additional
financial disclosures concerning off-balance sheet items, and speedier transaction reporting requirements for executive officers, directors and 10% shareholders than were previously required. In addition, Sarbanes-Oxley heightened penalties for
non-compliance with the Exchange Act. SEC rules promulgated pursuant to Sarbanes-Oxley impose obligations and restrictions on auditors and audit committees intended to enhance their independence from management, and include extensive additional
disclosure, corporate governance and other related rules.

Commercial Real Estate Lending Concentrations

In December 2006, the federal bank regulatory agencies released Guidance on Concentrations in Commercial Real Estate (CRE) Lending, Sound Risk
Management Practices (the Guidance). The Guidance, which was issued in response to the agencies concern that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of
adverse changes in the commercial real estate market, reinforces existing

regulations and guidelines for real estate lending and loan portfolio management. Highlights of the Guidance include the following:



The agencies have observed that CRE concentrations have been rising over the past several years with small to mid-size institutions showing the most
significant increase in CRE concentrations over the last decade. However, some institutions risk management practices are not evolving with their increasing CRE concentrations, and therefore, the Guidance reminds institutions that strong risk
management practices and appropriate levels of capital are important elements of a sound CRE lending program.



The Guidance applies to national banks and state chartered banks, and is also broadly applicable to bank holding companies. For purposes of the
Guidance, CRE loans include loans for land development and construction, other land loans, and loans secured by multifamily and nonfarm residential properties. The definition also extends to loans to real estate investment trusts and unsecured loans
to developers if their performance is closely linked to the performance of the general CRE market.



The agencies recognize that banks serve a vital role in their communities by supplying credit for business and real estate development, therefore the
Guidance is not intended to limit banks CRE lending. Instead, the Guidance encourages institutions to identify and monitor credit concentrations, establish internal concentration limits, and report concentrations to management and the board of
directors on a periodic basis.



The agencies recognize that different types of CRE lending present different levels of risk, and therefore, institutions are encouraged to segment
their CRE portfolios to acknowledge these distinctions. However, the CRE portfolio should not be divided into multiple sections simply to avoid the appearance of risk concentration.

As part of the ongoing supervisory monitoring processes, the agencies will use certain criteria to identify institutions that are potentially exposed
to significant CRE concentration risk. An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds specified supervisory criteria may be identified for further
supervisory analysis.

The Bank believes that the Guidance is applicable to it, as it has a relatively high level
concentration in CRE loans. The Bank and its board of directors have discussed the Guidance and believe that the Banks underwriting policies, management information systems, independent credit administration process and monitoring of real
estate loan concentrations is sufficient to address the Guidance.

Allowance for Loan and Lease Losses

In December 2006, the federal bank regulatory agencies released an Interagency Policy Statement on the Allowance for Loan and Lease Losses
(ALLL), which revises and replaces the banking agencies 1993 policy statement on the ALLL. The revised statement was issued to ensure consistency with generally accepted accounting principles (GAAP) and more recent supervisory
guidance, and it extended the scope to include credit unions.

Highlights of the revised statement include the following:



The revised statement emphasizes that the ALLL represents one of the most significant estimates in an institutions financial statements and
regulatory reports, and that an assessment of the appropriateness of the ALLL is critical to an institutions safety and soundness.



Each institution has a responsibility to develop, maintain, and document a comprehensive, systematic, and consistently applied process for determining
the amounts of the ALLL. An institution must maintain an ALLL that is sufficient to cover estimated credit losses on individual impaired loans as well as estimated credit losses inherent in the remainder of the portfolio.



The revised statement updated the previous guidance on the following issues regarding ALLL: (1) responsibilities of the board of directors,
management, and bank examiners; (2) factors to be considered in the estimation of ALLL; and (3) objectives and elements of an effective loan review system.

Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general are pending, and additional initiatives may be proposed or introduced before the
United States Congress, the California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the
Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what
form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.

Item 1A. RISK FACTORS

You should carefully consider the
following risk factors and all other information contained in this Annual Report before making investment decisions concerning the Companys common stock. The risks and uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties not presently known to the Company or that the Company currently believes are immaterial may also adversely impact the Companys business. If any of the events described in the following risk factors occur,
the Companys business, results of operations and financial condition could be materially adversely affected. In addition, the trading price of the Companys common stock could decline due to any of the events described in these risks.

Risks Relating to the Bank and to the Business of Banking in General

Our business has been and may continue to be adversely affected by volatile conditions in the financial markets and unfavorable economic conditions generally. From December 2007 through June 2009,
the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U. S. was greatly reduced. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a
number of institutions to fail or to require government intervention to avoid failure.

As a result of these financial and economic crises,
many lending institutions, including our company, have experienced significant declines in the performance of their loans, particularly construction, development and land loans, and unsecured commercial and consumer loans. Our total nonperforming
assets stood at $66.6 million at December 31, 2010, relative to $72.6 million at December 31, 2009 and $36.9 million at December 31, 2008, representing 8.07%, 7.98% and 3.87% of total gross loans and other real estate owned at
December 31, 2010, December 31, 2009 and December 31, 2008, respectively.

The California economy has been particularly hard
hit, and the economic decline has been a major factor leading to the significant increase in the Companys nonperforming assets and loan charge-offs since December 31, 2007. While unemployment levels have always been relatively high in the
San Joaquin Valley and in Tulare County, which is our geographic center and the base of our agriculturally oriented communities, the unemployment rate reached 17.7% in December 2010, up from 17.1% in December 2009 and 13.5% in December 2008. Local
unemployment rates were well above the 12.5% aggregate unemployment rate for California as of December 2010.

Although there are indications
of improving economic conditions nationally, certain sectors, such as real estate, remain weak and unemployment remains high, especially in our local markets. The state government, most local governments, and many businesses are still in serious
difficulty due to lower consumer spending and the lack of liquidity in the credit markets. In addition, the values of the real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Further
negative market developments also may continue to adversely affect consumer confidence levels and payment patterns, which could cause delinquencies and default rates to remain at high levels.

If business and economic conditions do not improve generally or in the principal markets in which we do business, the prolonged economic weakness could have one or more of the following adverse effects on
our business:

a decrease in the demand for loans or other products and services offered by us;



a decrease in the value of our loans or other assets secured by residential or commercial real estate;



a decrease in deposit balances due to overall reductions in the accounts of customers;



an impairment of our investment securities; and



an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations
to us, which in turn could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.

Challenges in the agricultural industry could have an adverse effect on our customers and their ability to make payments to us. While the current high level of the Companys nonperforming
assets is comprised mainly of other real estate owned and loans secured by land, lots, and residential real estate, difficulties facing the agricultural industry in our market areas have contributed to high levels of nonperforming assets in the
past. This is due to the fact that a sizable portion of our total loan portfolio consists of loans to borrowers either directly or indirectly involved in the agricultural industry. A great number of our borrowers may not be individually directly
involved in agriculture, but many of the jobs in the San Joaquin Valley are ancillary to the regular production, processing, marketing and sales of agricultural commodities.

The entry of global suppliers into the market has, in the past, led to excess market supply of many agricultural products, and a drop in consumer demand is currently contributing to softness in the
market. Because of increased supply from overseas competition, declining demand and other factors, low prices currently characterize the markets for many agricultural products. The ripple effect of lower commodity prices for milk, nuts, olives,
grapes, oranges and tree fruit has a tendency to depress land prices, lower borrower income, and decrease collateral values. Weather patterns are also of critical importance to row crop, tree fruit, and citrus production. A degenerative cycle of
weather has the potential to adversely affect agricultural industries as well as consumer purchasing power, and could lead to further unemployment throughout the San Joaquin Valley. Another potential looming issue that could have a major impact on
the agricultural industry involves water distribution rights. If the amount of water available to agriculture becomes increasingly scarce due to drought and/or diversion to other uses, farmers may not be able to continue to produce agricultural
products at a reasonable profit, which has the potential to force many out of business. Such conditions have affected and may continue to adversely affect our borrowers and, by extension, our business, and if general agricultural conditions decline
further our level of nonperforming assets could increase.

Concentrations of real estate loans could subject us to increased risks in the
event of a prolonged real estate recession or natural disaster. Our loan portfolio is heavily concentrated in real estate loans, particularly commercial real estate. At December 31, 2010, 77% of our loan portfolio consisted of loans secured
by real estate. Balances secured by commercial buildings and construction and development loans represented 63% of all real estate loans, while loans secured by non-construction residential properties accounted for 28%, and loans secured by farmland
were 9% of real estate loans.

The Companys $66.6 million balance of nonperforming assets at December 31, 2010 included $20.7
million in foreclosed assets, primarily other real estate owned (OREO) consisting of vacant land, lots, and residential properties. Nonperforming loans totaling $45.9 million comprised the remainder of the nonperforming assets, and $38.9 million of
that balance was in nonperforming real estate loans. The largest block of nonperforming real estate loans was $22.1 million in commercial real estate loans, and nonperforming construction and development loans totaled $10.2 million.

The Central Valley residential real estate market experienced significant deflation in property values during 2008 and 2009, and foreclosures have
continued to occur at relatively high rates since the beginning of the recession. If residential real estate values slide further, and/or if this weakness further impacts commercial real estate values, the Companys nonperforming assets could
increase from current levels. Such an increase could have a material adverse effect on our financial condition and results of operations by reducing our income, increasing our expenses, and leaving less cash available for lending and other
activities. As noted above, the primary collateral for many of our loans consists of commercial real estate properties, and continued deterioration in the real estate market in the areas the Company serves would likely reduce the value of the
collateral value for many of our loans and could negatively impact the repayment ability of many of our borrowers. It might also reduce further the amount of loans the

Company makes to businesses in the construction and real estate industry, which could negatively impact our organic growth prospects. Similarly, the occurrence of a natural disaster like those
California has experienced in the past, including earthquakes, brush fires, and flooding, could impair the value of the collateral we hold for real estate secured loans and negatively impact our results of operations.

In addition, banking regulators now give commercial real estate loans extremely close scrutiny, due to risks relating to the cyclical nature of the real
estate market and related risks for lenders with high concentrations of such loans. The regulators have required banks with relatively high levels of CRE loans to implement enhanced underwriting standards, internal controls, risk management policies
and portfolio stress testing, which has resulted in higher allowances for possible loan losses. Expectations for higher capital levels have also materialized. Any increase in our allowance for loan losses would adversely affect our net income, and
any requirement that we maintain higher capital levels could adversely impact financial performance measures such as earnings per share.

Our concentrations of commercial real estate, construction and land development, and commercial and industrial loans expose us to increased lending
risks. Commercial real estate, construction and land development, and commercial and industrial loans and leases, including agricultural production loans but not including SBA loans, comprised approximately 64% of our total loan portfolio as of
December 31, 2010, and expose the Company to a greater risk of loss than residential real estate and consumer loans, which comprised a smaller percentage of the total loan portfolio. Commercial real estate and land development loans typically
involve larger loan balances to single borrowers or groups of related borrowers compared to residential loans. Consequently, an adverse development with respect to one commercial loan or one credit relationship exposes us to a significantly greater
risk of loss compared to an adverse development with respect to one residential mortgage loan.

Repayment of our commercial loans is often
dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. At December 31, 2010, we had $118 million or 15% of total loans in commercial loans and leases,
including agricultural production loans but not including SBA loans. Commercial lending involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be
collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. Our commercial
loans are primarily made based on the cash flow of the borrower and secondarily on any underlying collateral provided by the borrower. The borrowers cash flow may be unpredictable, and collateral securing these loans may fluctuate in value.
Although commercial loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable
may be uncollectible and inventories may be obsolete or of limited use, among other things. Accordingly, the repayment of commercial loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying
collateral provided by the borrower.

Nonperforming assets take significant time to resolve and adversely affect our results of operations
and financial condition. Our nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect that our nonperforming loans will continue at relatively high levels, which will
negatively impact earnings and could have a substantial adverse impact if conditions deteriorate further. We do not record interest income on non-accrual loans, thereby adversely affecting our level of interest income. Additionally, our non-interest
expense has increased due to the costs of reappraising adversely classified assets, legal and other costs associated with loan collections, operating costs related to foreclosed assets, and various other expenses that would not typically be incurred
in a normal operating environment. Furthermore, when we receive collateral through foreclosures and similar proceedings, we are required to record the collateral at its fair market value less estimated selling costs, which may result in write-downs
or losses. An increase in the level of nonperforming assets also increases our risk profile and may impact the capital levels our regulators believe is appropriate in light of such risks. We utilize various techniques such as loan sales, workouts
and restructurings to manage our problem assets. Decreases in the value of these problem assets, the underlying collateral, or in the borrowers performance or financial condition, could adversely affect our business, results of operations and
financial condition. In addition, the resolution of nonperforming assets requires a significant commitment of time from management and staff, which can

be detrimental to performance of their other responsibilities. There can be no assurance that we will avoid further increases in nonperforming loans in the future.

We may experience loan and lease losses in excess of our allowance for such losses. We endeavor to limit the risk that borrowers might fail to
repay; nevertheless, losses can and do occur. We maintain an allowance for estimated loan and lease losses in our accounting records, based on estimates of the following:



historical experience with our loans;



evaluation of economic conditions;



regular reviews of the quality mix and size of the overall loan portfolio;



a detailed cash flow analysis for nonperforming loans;



regular reviews of delinquencies; and



the quality of the collateral underlying our loans.

We maintain our allowance for loan and lease losses at a level that we believe is adequate to absorb specifically identified probable losses as well as any other losses inherent in our loan portfolio at a
given date. While we strive to carefully monitor credit quality and to identify loans that may become nonperforming, at any time there are loans in the portfolio that could result in losses, but that have not been identified as nonperforming or
potential problem loans. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that have been identified. Changes in economic, operating
and other conditions, including changes in interest rates, deteriorating values in underlying collateral (most of which consists of real estate), and the financial condition of borrowers, which are beyond our control, may cause our estimate of
probable losses or actual loan losses to exceed our current allowance. In addition, the FDIC and the DFI, as part of their supervisory functions, periodically review our allowance for loan and lease losses. Such agencies may require us to increase
our provision for loan and lease losses or to recognize further losses, based on their judgments, which may be different from those of our management. Any such increase in the allowance required by the FDIC or the DFI could also hurt our business.

Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property
collateral. In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an error
in fact or judgment could adversely affect the reliability of an appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors the value of collateral
backing a loan may be less than supposed, and if a default occurs we may not recover the outstanding balance of the loan.

Our expenses
have increased and could continue to increase as a result of increases in FDIC insurance premiums. The FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the deposit insurance reserve ratio to 1.35% of
estimated insured deposits or the comparable percentage of the assessment base at any time the reserve ratio falls below 1.35%. Recent bank failures have depleted the deposit insurance fund balance, which has been in a negative position since the
end of 2009, and the FDIC currently has until September 30, 2020 to bring the reserve ratio back to the statutory minimum. As noted above under Regulation and Supervision  Deposit Insurance, the FDIC has implemented a
restoration plan that adopts a new assessment base and establishes new assessment rates starting with the second quarter of 2011. The FDIC also imposed a special assessment in 2009 and required the prepayment of three years of FDIC insurance
premiums at the end of 2009. The prepayments are designed to help address liquidity issues created by potential timing differences between the collection of premiums and charges against the DIF, but it is generally expected that assessment rates
will remain relatively high in the near term due to the significant cost of bank failures and the relatively large number of troubled banks. Any further significant premium increases or special assessments could have a material adverse effect on our
financial condition and results of operations.

We may not be able to continue to attract and retain banking customers, and our efforts to
compete may reduce our profitability. Competition in the banking industry in the markets we serve may limit our ability to continue to attract and retain banking customers. The banking business in our current and intended future market areas is
highly competitive with respect to virtually all products and services. In California generally, and in our

service areas specifically, branches of major banks dominate the commercial banking industry. Such banks have substantially greater lending limits than we have, offer certain services we cannot
offer directly, and often operate with economies of scale that result in lower operating costs than ours on a per loan or per asset basis. We also compete with numerous financial and quasi-financial institutions for deposits and loans,
including providers of financial services over the Internet. New technology and other changes are allowing parties to effectuate financial transactions that previously required the involvement of banks. For example, consumers can maintain funds that
would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks
as intermediaries, known as disintermediation, could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost
deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

In addition, with
the increase in bank failures, customers are increasingly concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to ensure that the amount they have on deposit with their bank is
fully insured. Decreases in deposits may adversely affect our funding costs and net income. Ultimately, competition can and does increase our cost of funds, reduce loan yields and drive down our net interest margin, thereby reducing profitability.
It can also make it more difficult for us to continue to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily on wholesale borrowings, which are generally more expensive than deposits.

If we are not able to successfully keep pace with technological changes affecting the industry, our business could be hurt. The financial services
industry is constantly undergoing technological change, with the frequent introduction of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better service clients
and reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as create additional efficiencies within our
operations. Some of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products
and services to our clients. Failure to successfully keep pace with technological change in the financial services industry could have a material adverse impact on our business and, in turn, on our financial condition and results of operations.

If our information systems were to experience a system failure or a breach in security, our business and reputation could suffer. We
rely heavily on communications and information systems to conduct our business. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer
equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. In addition, we must be able to protect our computer systems and network infrastructure against physical damage, security breaches and
service disruption caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure. We have
protective measures in place to prevent or limit the effect of the failure, interruption or security breach of our information systems and will continue to implement security technology and monitor and update operational procedures to prevent such
damage. However, if such failures, interruptions or security breaches were to occur, they could result in damage to our reputation, a loss of customers, increased regulatory scrutiny, or possible exposure to financial liability, any of which could
have a material adverse effect on our financial condition and results of operations.

We are subject to a variety of operational risks,
including reputational risk, legal risk and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations. We are exposed to many types of operational risks,
including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from
faulty or disabled computer or telecommunications systems.

If personal, non-public, confidential or proprietary information of customers in our possession were to be
mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could occur, for example, if information were erroneously provided to parties who are not permitted to
have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our
necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems could result in losses that are
difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters,
disease pandemics or other damage to property or physical assets) which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill
their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors) business continuity and data security systems prove to be
inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to clients,
reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.

Recently enacted and potential further financial regulatory reforms could have a significant impact on our business, financial condition and results of operations. The Dodd-Frank Wall Street Reform
and Consumer Protection Act was enacted in July 2010. Dodd-Frank is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in Dodd-Frank will
be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of Dodd-Frank will be implemented by the various regulatory
agencies and through regulations, the full extent of the impact these requirements will have on our operations is unclear. The changes resulting from Dodd-Frank may impact the profitability of business activities, require changes to certain business
practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. In particular, the potential impact of Dodd-Frank on our operations and activities, both currently and prospectively, include,
among others:



a reduction in the ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards;



increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit
insurance premiums;



the limitation on the ability to raise new capital through the use of trust preferred securities, as any new issuances of these securities are not
includible as Tier 1 capital;



a potential reduction in fee income due to limits on interchange fees applicable to larger institutions which could effectively reduce the fees we can
charge; and



the limitation on the ability to expand consumer product and service offerings due to anticipated stricter consumer protection laws and regulations.

Further, we may be required to invest significant management attention and resources to evaluate and make any changes
necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may negatively impact results of operations and financial condition.

Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be
adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse effect on our financial condition and results of
operations.

We may be adversely affected by the soundness of other financial institutions. Our ability to engage in routine funding
transactions could be adversely affected by the actions and liquidity of other financial institutions. Financial

institutions are often interconnected as a result of trading, clearing, counterparty, or other business relationships. We have exposure to many different industries and counterparties, and
routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the
event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when collateral held by us cannot be liquidated at prices sufficient to recover the full amount of the credit or derivative exposure due to us. Any such
losses could adversely affect our business, financial condition or results of operations.

Changes in interest rates could adversely affect
our profitability, business and prospects. Banking companies earnings depend largely on the relationship between the cost of funds, primarily deposits and borrowings, and the yield on earning assets, such as loans and investment
securities. That relationship, known as the interest rate spread, is subject to fluctuation and is affected by the monetary policies of the Federal Reserve Board and the international interest rate environment, as well as by economic, regulatory and
competitive factors which influence interest rates, the volume and mix of interest earning assets and interest bearing liabilities, and the level of nonperforming assets. Many of these factors are beyond our control. We are subject to interest rate
risk to the degree that our interest bearing liabilities re-price or mature more slowly or more rapidly or on a different basis than our interest earning assets. For example, if the rate of interest we pay on interest-bearing deposits, borrowings,
and other liabilities increases more than the rate of interest we receive on loans, securities, and other interest-earning assets, our net interest income and therefore our earnings could be adversely affected. Our earnings could also be adversely
affected if the rates on our loans and other investments fall more quickly than those on our deposits and other liabilities.

In addition,
fluctuations in interest rates affect the demand of customers for products and services. For example, rising interest rates are generally associated with a lower volume of loan originations, while lower interest rates typically generate increased
loan originations. Moreover, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to make variable-rate loan payments as they adjust upward. Accordingly, changes in market interest rates could
materially and adversely affect our net interest spread, asset quality, loan origination volume, business, financial condition, results of operations, and cash flows.

We depend on our executive officers and key personnel to implement our business strategy and could be harmed by the loss of their services. We believe that our continued growth and success depends
in large part upon the skills of our management team and other key personnel. The competition for qualified personnel in the financial services industry is intense, and the loss of key personnel or an inability to continue to attract, retain or
motivate key personnel could adversely affect our business. If we are not able to retain our existing key personnel or attract additional qualified personnel, our business operations would be hurt. None of our executive officers have employment
agreements.

The value of securities in our investment securities portfolio may be negatively affected by continued disruptions in
securities markets. The market for some of the investment securities held in our portfolio has experienced volatility and disruption for the last several years. These market conditions may have a detrimental effect on the value of our
securities, such as reduced valuations because of the perception of heightened credit risks or due to illiquid markets for certain securities. There can be no assurance that the declines in market value associated with these disruptions will not
result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our results of operations and capital levels.

We are exposed to risk of environmental liabilities with respect to properties to which we obtain title. Approximately 77% of our loan portfolio at December 31, 2010 was secured by real
estate. In the normal course of business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for
property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business and prospects.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our
interest expense. All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions
could commence offering interest on demand deposits to compete for clients. We do not yet know what interest rates other institutions may offer. Our interest expense will increase and our net interest margin will decrease if we begin offering
interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to our Common Stock

The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock at times or at prices
you find attractive. The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition, the stock market is subject to fluctuations in share prices and trading
volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of our common stock. Among the factors that could affect our common stock price in the future are:

anticipated or pending investigations, proceedings, or litigation that involve or affect us; and



domestic and international economic factors unrelated to our performance.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result, the market price of our common stock may be volatile. In addition,
the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the shares of our common stock also depends on many other factors which may change from time to time,
including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or equity related securities, and other factors identified elsewhere in this report. The capital and credit markets have
been experiencing volatility and disruption for several years, at times reaching unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those
issuers underlying financial strength. A significant decline in our stock price could result in substantial losses for individual shareholders and could lead to costly and disruptive securities litigation.

We may pursue additional capital in the future, which may not be available on acceptable terms or at all, could dilute the holders of our outstanding
common stock, and may adversely affect the market price of our common stock. In the current economic environment, we believe it is prudent to consider alternatives for raising capital when opportunities to raise capital at attractive prices
present themselves, in order to further strengthen our capital and better position ourselves to take advantage of opportunities that may arise in the future. Our ability to raise additional capital, if needed, will depend on, among other things,
conditions in the capital markets at the time, which are outside of our control, and our financial performance. We cannot provide any assurance that such capital will be available to us on acceptable terms or at all. Any such capital raising
alternatives could dilute the holders of our outstanding common stock, and may adversely affect the market price of our common stock and our performance measures such as earnings per share.

The Company relies heavily on the payment of dividends from the Bank. Other than $8.2 million in cash
available at the holding company level at December 31, 2010, the Companys ability to meet debt service requirements and to pay dividends depends on the Banks ability to pay dividends to the Company, as it has no other source of
significant income. However, the Bank is subject to regulations limiting the amount of dividends it may pay. For example, the payment of dividends by the Bank is affected by the requirement to maintain adequate capital pursuant to the capital
adequacy guidelines issued by the Federal Deposit Insurance Corporation. All banks and bank holding companies are required to maintain a minimum ratio of qualifying total capital to total risk-weighted assets of 8%, at least one-half of which must
be in the form of Tier 1 capital, and a ratio of Tier 1 capital to average adjusted assets of 4%. If (i) any of these required ratios are increased; (ii) the total of risk-weighted assets of the Bank increases significantly; and/or
(iii) the Banks income declines significantly, the Banks Board of Directors may decide or be required to retain a greater portion of the Banks earnings to achieve and maintain the required capital or asset ratios. This will
reduce the amount of funds available for the payment of dividends by the Bank to the Company. Further, in some cases, the Federal Reserve Board could take the position that it has the power to prohibit the Bank from paying dividends if, in its view,
such payments would constitute unsafe or unsound banking practices. The Banks ability to pay dividends to the Company is also limited by the California Financial Code. Whether dividends are paid and their frequency and amount will also depend
on the financial condition and performance, and the discretion of the Board of Directors of the Bank. Information concerning the Companys dividend policy and historical dividend practices is set forth below under Dividend Policy.
However, no assurance can be given that our future performance will justify the payment of dividends in any particular year.

You may not
be able to sell your shares at the times and in the amounts you want if the trading market for our stock is not active. Although our stock has been listed on NASDAQ for many years, trading in our stock does not consistently occur in high volumes
and cannot always be characterized as an active trading market. The limited trading market for our common stock may exaggerate fluctuations in the value of our common stock, leading to price volatility in excess of that which would occur in a more
active trading market. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could also adversely affect the prevailing market price of our common stock.

Your investment may be diluted because of the ability of management to offer stock to others and stock options. The shares of our common stock do
not have preemptive rights. This means that you may not be entitled to buy additional shares if shares are offered to others in the future. We are authorized to issue 24,000,000 shares of common stock, and as of December 31, 2010 we had
13,976,741 shares of our common stock outstanding. Except for certain limitations imposed by NASDAQ, nothing restricts managements ability to offer additional shares of stock for fair value to others in the future. Any issuances of common
stock would dilute our shareholders ownership interests and may dilute the per share book value of our common stock. In addition, when our directors, executive officers and key employees exercise any of their stock options, your ownership in
the Company will be diluted. As of December 31, 2010, there were outstanding options to purchase an aggregate of 834,868 shares of our common stock with an average exercise price of $14.24 per share. At the same date there were an additional
1,023,920 shares available for grant under our 2007 Stock Incentive Plan.

Shares of our preferred stock issued in the future could have
dilutive and other effects. Shares of our preferred stock eligible for future issuance and sale could have a dilutive effect on the market for shares of our common stock. Our Articles of Incorporation authorize us to issue 10,000,000 shares of
preferred stock, none of which is presently outstanding. Although our Board of Directors has no present intent to authorize the issuance of shares of preferred stock, such shares could be authorized in the future. If such shares of preferred stock
are made convertible into shares of common stock, there could be a dilutive effect on the shares of common stock then outstanding. In addition, shares of preferred stock may be provided a preference over holders of common stock upon our liquidation
or with respect to the payment of dividends, in respect of voting rights or in the redemption of our common stock. The rights, preferences, privileges and restrictions applicable to any series or preferred stock would be determined by resolution of
our Board of Directors.

The holders of our debentures have rights that are senior to those of our shareholders. In 2004 we issued
$15,464,000 of junior subordinated debt securities due March 17, 2034 and in 2006 we issued an additional $15,464,000 of junior subordinated debt securities due September 23, 2036 in order to raise additional regulatory

capital. These junior subordinated debt securities are senior to the shares of our common stock. As a result, we must make interest payments on the debentures before any dividends can be paid on
our common stock, and in the event of our bankruptcy, dissolution or liquidation, the holders of the debt securities must be paid in full before any distributions may be made to the holders of our common stock. In addition, we have the right to
defer interest payments on the junior subordinated debt securities for up to five years, during which time no dividends may be paid to holders of our common stock. In the event that the Bank is unable to pay dividends to us, then we may be unable to
pay the amounts due to the holders of the junior subordinated debt securities and, thus, we would be unable to declare and pay any dividends on our common stock.

Provisions in our articles of incorporation could delay or prevent changes in control of our corporation or our management. Our articles of incorporation contain provisions for staggered terms of
office for members of the board of directors; no cumulative voting in the election of directors; and the requirement that our board of directors consider the potential social and economic effects on our employees, depositors, customers and the
communities we serve as well as certain other factors, when evaluating a possible tender offer, merger or other acquisition of the Company. These provisions make it more difficult for another company to acquire us, which could cause our shareholders
to lose an opportunity to be paid a premium for their shares in an acquisition transaction, and reduce the current and future market price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The Companys administrative headquarters is located at 86 North Main Street, Porterville, California, and is leased through July 2013 from parties unrelated to the Company. It consists of
approximately 37,000 square feet in a three-story building of which the Company is sole occupant. The Companys main office is located at 90 N. Main Street, Porterville, California, adjacent to its administrative headquarters, and it consists
of a one-story brick building that sits upon unencumbered property owned by the Company. The Company also owns unencumbered property on which 14 of its other offices are located, namely the following branches: Porterville West Olive, Bakersfield
Ming, California City, Dinuba, Exeter, Farmersville, Fresno Shaw, Hanford, Lindsay, Tehachapi Downtown, Tehachapi Old Town, Three Rivers, Tulare, and Visalia Mooney. The remaining branches are all leased from unrelated parties. In addition, the
Company operates a technology center in Porterville which consists of approximately 12,000 square feet in a freestanding single-story building that is leased from unrelated parties, and the Bank has eight remote ATM locations leased from unrelated
parties. While limited branch expansion is planned over the course of the next few years, management believes that existing back office facilities are adequate to accommodate the Companys operations for the immediately foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company as to
the current status of these claims or proceedings to which the Company is a party, management is of the opinion that the ultimate aggregate liability represented thereby, if any, will not have a material adverse affect on the financial condition of
the Company.

Sierra Bancorps Common Stock trades on the NASDAQ Global Select Market under the symbol BSRR, and the CUSIP number for our stock is #82620P102. Trading in the Common Stock of the Company has not
consistently occurred in high volumes, and such trading activity cannot always be characterized as constituting an active trading market. The following table summarizes trades of the Companys Common Stock, setting forth the approximate high
and low sales prices and volume of trading for the periods indicated, based upon information provided by public sources.

Calendar

Quarter Ended

Sale Price of the CompanysCommon Stock (per
share)

ApproximateTrading VolumeIn Shares

High

Low

March 31, 2009

$

21.61

$

6.10

1,732,221

June 30, 2009

$

15.26

$

9.39

1,345,876

September 30, 2009

$

14.21

$

11.55

1,247,179

December 31, 2009

$

12.70

$

7.00

2,041,361

March 31, 2010

$

13.73

$

7.18

1,898,909

June 30, 2010

$

14.12

$

11.49

1,871,420

September 30, 2010

$

12.50

$

10.81

1,605,491

December 31, 2010

$

13.10

$

10.06

1,916,775

(b) Holders

As of February 15, 2011 there were approximately 2,672 shareholders of the Companys Common Stock. Per the Companys stock transfer agent
there were 595 registered holders of record on that date, and there were approximately 2,077 beneficial holders whose shares are held under a street name.

(c) Dividends

The Company paid cash dividends totaling $2.9 million, or $0.24 per share in
2010, and $4.1 million, or $0.40 per share in 2009, representing 40% of annual net earnings for dividends paid in 2010 and 46% in 2009. The Companys general dividend policy is to pay cash dividends within the range of typical peer payout
ratios, provided that such payments do not adversely affect the Companys financial condition and are not overly restrictive to its growth capacity. While most of our peers have elected to suspend dividend payments, at least temporarily, the
Companys Board has concluded that a certain level of dividend should be maintained as long as our core operating performance remains adequate and policy or regulatory restrictions do not preclude such payments. That said, in an effort to
conserve capital in an uncertain environment and maintain a rational dividend payout ratio, our quarterly per-share dividend was reduced in 2009 and lowered again in 2010, and no assurance can be given that our financial performance in any given
year will justify the continued payment of a cash dividend. As a bank holding company that currently has no significant assets other than its equity interest in the Bank, the Companys ability to declare dividends depends primarily upon current
levels of cash on hand, as supplemented by dividends it might receive from the Bank. The Banks dividend practices in turn depend upon the Banks earnings, financial position, current and anticipated capital requirements, and other factors
deemed relevant by the Banks Board of Directors at that time. The power of the Banks Board of Directors to declare cash dividends is also subject to statutory and regulatory restrictions. Under California banking law, the Bank may
declare dividends in an amount not exceeding the lesser of its retained earnings or its net income for the last three years (reduced by dividends paid during such period) or, with the prior approval of the California Commissioner of Financial
Institutions, in an amount not exceeding the greatest of (i) the retained earnings of the Bank, (ii) the net income of the Bank for its last fiscal year, or (iii) the net income of the Bank for its

current fiscal year. The payment of any cash dividends by the Bank will depend not only upon the Banks earnings during a specified period, but also on the Bank meeting certain regulatory
capital requirements.

The Companys ability to pay dividends is also limited by state corporation law. The California General
Corporation Law allows a California corporation to pay dividends if the companys retained earnings equal at least the amount of the proposed dividend. If a California corporation does not have sufficient retained earnings available for the
proposed dividend, it may still pay a dividend to its shareholders if immediately after the dividend the sum of the companys assets (exclusive of goodwill and deferred charges) would be at least equal to 125% of its liabilities (not including
deferred taxes, deferred income and other deferred liabilities) and the current assets of the company would be at least equal to its current liabilities, or, if the average of its earnings before taxes on income and before interest expense for the
two preceding fiscal years was less than the average of its interest expense for the two preceding fiscal years, at least equal to 125% of its current liabilities. In addition, during any period in which the Company has deferred payment of interest
otherwise due and payable on its subordinated debt securities, it may not make any dividends or distributions with respect to its capital stock (see Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations  Capital Resources).

The following table provides information as of December 31, 2010, with respect to options outstanding and available under our 2007 Stock Incentive
Plan and the now-terminated 1998 Stock Option Plan, which are our only equity compensation plans other than an employee benefit plan meeting the qualification requirements of Section 401(a) of the Internal Revenue Code:

Plan Category

Number of Securitiesto be
IssuedUpon Exercise ofOutstanding Options

Weighted-AverageExercise
Priceof OutstandingOptions

Number of SecuritiesRemaining Availablefor Future Issuance

Equity compensation plans approved by security holders

834,868

$

14.24

1,023,920

(e) Performance Graph

The following is a five-year performance graph comparing the total cumulative shareholder return on the Companys common stock to the
cumulative total returns of the NASDAQ Composite Index (a broad equity market index), the SNL Bank Index, and the SNL $1 billion to $5 billion (asset size) Bank Index (the latter two qualifying as peer bank indices), assuming a $100 investment on
December 31, 2005 and reinvestment of dividends:

The Company has a non-expiring stock repurchase program that became effective July 1, 2003, under which all share repurchases are executed in accordance with SEC Rule 10b-18. The plan initially
allowed for the repurchase of up to 250,000 shares, and was supplemented by an additional 250,000 shares in May 2005, another 250,000 shares in March 2006, and 500,000 shares in April 2007. As noted in the table below, the Company did not repurchase
any of its Common Stock during the fourth quarter of 2010, nor do we anticipate repurchasing any Common Stock in 2011.

October

November

December

Total shares purchased

0

0

0

Average per share price

N/A

N/A

N/A

Number of shares purchased as part of publicly announced plan or program

0

0

0

Maximum number of shares remaining for purchase under a plan or program

100,669

100,669

100,669

ITEM 6.

SELECTED FINANCIAL DATA

The following
table presents selected historical financial information concerning the Company, which should be read in conjunction with our audited consolidated financial statements, including the related notes and Managements Discussion and Analysis
of Financial Condition and Results of Operations, included elsewhere herein. The selected financial data as of December 31, 2010 and 2009, and for each of the years in the three year period ended December 31, 2010, is derived from
our audited consolidated financial statements and related notes which are included in this Annual Report. The selected financial data for prior years is derived from our audited financial statements which are not included in this Annual Report.
Throughout this Annual Report, information is for the consolidated Company unless otherwise stated.

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

This discussion presents Managements analysis of the financial condition of the Company as of
December 31, 2010 and December 31, 2009, and the results of operations for each of the years in the three-year period ended December 31, 2010. The discussion should be read in conjunction with the Consolidated Financial Statements of
the Company and the Notes related thereto presented elsewhere in this Form 10-K Annual Report (see Item 8 below).

Statements contained
in this report or incorporated by reference that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, including the Companys expectations,
intentions, beliefs, or strategies regarding the future. All forward-looking statements concerning economic conditions, growth rates, income, expenses, or other values which are included in this document are based on information available to the
Company on the date noted, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Companys actual results could materially differ from those in such forward-looking statements.
Risk factors that could cause actual results to differ materially from those in forward-looking statements include but are not limited to those outlined previously in Item 1A.

Critical Accounting Policies

The Companys financial statements are prepared
in accordance with accounting principles generally accepted in the United States. The financial information and disclosures contained within those statements are significantly impacted by Managements estimates and judgments, which are based on
historical experience and various other assumptions that are believed to be reasonable under current circumstances. Actual results may differ from those estimates under divergent conditions.

Critical accounting policies are those that involve the most complex and subjective decisions and assessments, and have the greatest potential impact on the Companys stated results of operations. In
Managements opinion, the Companys critical accounting policies deal with the following areas: the establishment of the Companys allowance for loan losses, as explained in detail in the Provision for Loan Losses and
Allowance for Loan Losses sections of this discussion and analysis; the valuation of nonperforming real estate loans and foreclosed assets; deferred loan origination costs, which are estimated based on an annual evaluation of expenses
(primarily salaries) associated with successful loan originations and are allocated to individual loans as they are booked, but can actually vary significantly for individual loans depending on the characteristics of such loans (deferred amounts are
disclosed below in conjunction with salaries expense, under Non-interest Revenue and Operating Expense); income taxes, especially with regard to the ability of the Company to recover deferred tax assets, as discussed in the
Provision for Income Taxes and Other Assets sections of this discussion and analysis; goodwill, which is evaluated annually for impairment based on the fair value of the Company and for which it has been determined that no
impairment exists; and equity-based compensation, which is discussed in greater detail in footnote 2 (Significant Accounting Policies) to the financial statements contained herein, under the caption Stock-Based Compensation. Critical
accounting areas are evaluated on an ongoing basis to ensure that the Companys financial statements incorporate the most recent expectations with regard to these areas.

Summary of Performance

There are signs of improvement in the national economy, but
Californias economy remains under considerable stress and recessionary conditions have depressed the Companys earnings for the past three years. Furthermore, industry-wide regulatory pressures on certain components of non-interest income
exacerbated the negative impact of economic conditions on our financial performance in 2010. Net income was $7.4 million in 2010, a drop of $1.6 million, or 18%, from the $8.9 million in net earnings recognized in 2009. Likewise, net income in 2009
was $4.5 million lower than 2008 net earnings of $13.4 million. Net income per diluted share was $0.60 for 2010, as compared to $0.86 in 2009 and $1.37 in 2008. The Companys Return on Average Assets was 0.56% and Return on Average Equity was
5.16% in 2010, as compared to 0.68% and 7.56%, respectively for 2009, and 1.05% and 12.86%, respectively in 2008.

The following are major factors impacting the Companys results of operations in recent years:



Net interest income declined by $1.787 million, or 3%, in 2010 relative to 2009, but reflects an increase of $1.360 million, or 2%, in 2009 relative
to 2008. The decline in 2010 is due to an $11 million drop in the average balance of interest-earning assets and a 10 basis point slide in our net interest margin. Our net interest margin was negatively impacted in 2010 by a shift from average
loan balances into lower-yielding investment balances, higher average balances for non-interest earning cash and due from banks and other non-earning assets, and a $418,000 increase in net interest reversals on loans placed on non-accrual status.
The increase in net interest income in 2009 relative to 2008 was due to the fact that net interest reversals were $1.810 million lower in 2009.



A relatively large provision for loan losses had a material negative impact on our financial results in 2010, 2009 and 2008. Our loan loss provision
was $16.680 million in 2010, relative to $21.574 million in 2009 and $19.456 million in 2008. In 2010, our loan loss provision was primarily utilized to build general reserves for performing loans due to higher historical loss factors, provide
specific reserves for loans that migrated into impaired status, and replenish reserves subsequent to loan charge-offs. We experienced net charge offs totaling $19.257 million in 2010, $12.953 million in 2009, and 16.638 million in 2008.
Charge-offs were higher in 2010 because reserves that had been established in prior periods for specifically-identified losses on certain impaired loans were determined to be uncollectible and written off. In 2009, a rising level of impaired loans
required greater specific reserves. A significant increase in nonperforming assets and a higher level of charge-offs are factors that contributed to the loan loss provision required in 2008.



Non-interest income increased by $582,000, or 3%, in 2010 relative to 2009, and by $1.292 million, or 8%, in 2009 relative to 2008. A higher
level of losses on the sale of OREO and a lower level of deposit service charges had an unfavorable impact on the comparative level of non-interest income in 2010, but these negatives were more than offset by a $1.544 million increase in gains on
the sale of investment securities, a higher level of check card interchange fees, and a lower level of pass-through losses on our low-income housing tax credit investments. For 2009, the primary drivers behind the higher level of non-interest income
relative to 2008 were an increase in income associated with deferred compensation BOLI and investment gains, which were partially offset by lower income in other areas stemming from non-recurring income in 2008.



Operating expense increased by $6.096 million, or 14%, in 2010 relative to 2009, and by $8.279 million, or 23%, in 2009 compared to 2008. The
increase in 2010 is primarily the result of the following: Loan costs increased by $4.146 million, due to a higher level of OREO write-downs and OREO operating expense; and salaries were up by $1.906 million, largely because of higher incentive
compensation accruals. These and other expense increases were partially offset by a $941,000 drop in FDIC costs in 2010, resulting from an industry-wide special assessment in the second quarter of 2009 and a declining assessment base in 2010. The
principal causes of the increase in 2009 relative to 2008 include higher FDIC assessments, higher compensation costs due to a drop in deferred salaries related to successful loan originations and higher accruals associated with deferred compensation
plans, and an increase in OREO write-downs and other lending-related costs. Several non-recurring items also affected operating expense, as explained in detail below under Non-interest Revenue and Operating Expense.



A negative income tax provision helped boost net income in 2010. The negative provision is the result of a high level of tax credits relative to
our tax liability, which is favorably impacted by tax-exempt interest income and BOLI income.

The Companys assets
totaled $1.287 billion at December 31, 2010, relative to total assets of $1.336 billion at December 31, 2009. Total liabilities were $1.127 billion at the end of 2010 compared to $1.201 billion at the end of 2009, and we had
shareholders equity totaling $160 million at December 31, 2010 relative to $134 million at December 31, 2009. The following summarizes recent key balance sheet changes during 2010:

Total assets declined by $49 million, or 4%. Investment securities, fed funds sold, cash, and balances due from banks were up by a combined $30
million, or 9%, but that growth was more than offset by a drop of $76 million, or 9%, in net loan balances, and foreclosed assets were also reduced by a net $5 million, or 19%, in 2010. Loan balances declined due to runoff in the normal course of
business, transfers to OREO, and charge-offs, as well as loan payoffs and sales. Due to our current focus on credit issues and core deposit generation, and because of weak loan demand from creditworthy borrowers, we expect limited, if any, net
growth in outstanding loan balances in 2011 and no assurance can be provided that loans will not continue to decline.



Our allowance for loan and lease losses was $21.1 million as of December 31, 2010, which represents a drop of $2.6 million relative to the
balance at December 31, 2009. The net decline in the allowance is the result of charging off certain impaired, collateral-dependent loan balances that were determined to be uncollectible, against previously-established specific reserves.
Even though the allowance for loan and lease losses declined during 2010, loan balances also fell, so our allowance as a percentage of total loans dropped by only 6 basis points, to 2.62% at December 31, 2010 from 2.68% at December 31,
2009.



Nonperforming assets declined by $6 million, or 8%, during 2010, ending the year at $67 million. The net decrease for the year is due to a $5
million reduction in foreclosed assets, and a $1 million reduction in non-accruing loans. Despite the decline in nonperforming balances, nonperforming assets increased slightly as a percentage of total loans plus OREO due to the declining balance of
outstanding loans.



Total deposits declined by $73 million, or 7%, during 2010, although core non-maturity balances were up a combined $55 million, or 9%. Total
deposits declined primarily because we have managed down balances from larger depositors to reduce our exposure to potential single-customer withdrawals, and have not aggressively pursued the renewal of certain other time deposits managed by our
Treasury Department. We also let $28 million in wholesale-sourced brokered deposits roll off in 2010. Non-maturity deposits experienced significant growth due in part to our aggressive deposit acquisition programs.



Total shareholders equity increased by $25 million, or 19%, during the year, due in large part to our registered direct offering that
closed in October and added a net $22 million to capital. Because capital increased by 19% while risk-adjusted assets declined, our capital ratios continued their upward trend during 2010. As of December 31, 2010, our consolidated total
risk-based capital ratio was 20.33%, our Tier 1 risk-based capital ratio was 19.06%, and our Tier 1 leverage ratio was 13.84%.

Results of Operations

The Company earns income from two primary sources. The first
is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. The second is non-interest income, which primarily consists of customer service charges and fees but also comes from
non-customer sources such as bank-owned life insurance. The majority of the Companys non-interest expenses are operating costs that relate to providing a full range of banking services to our customers.

Net Interest Income and Net Interest Margin

Net interest income was $56.2 million in 2010, compared to $58.0 million in 2009 and $56.6 million in 2008. This represents a decline of 3% in 2010, and an increase of 2% for 2009. The level of net
interest income depends on several factors in combination, including growth in earning assets, yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix
of products which comprise the Companys earning assets, deposits, and other interest-bearing liabilities. Net interest income can also be impacted by the reversal of interest for loans placed on non-accrual, and by the recovery of interest on
loans that have been on non-accrual and are either sold or returned to accrual status.

The following Distribution, Rate and Yield table
shows, for each of the past three years, the average balance for each principal balance sheet category, and the amount of interest income or interest expense associated with that category.

This table also shows the calculated yields on each major component of the Companys investment and loan portfolio, the average rates paid on each key segment of the Companys
interest-bearing liabilities, and our net interest margin.

Average balances are obtained from the best available daily or monthly data and are net of deferred fees and related direct costs.

(b)

Yields and net interest margin have been computed on a tax equivalent basis.

(c)

Net loan fees have been included in the calculation of interest income. Net loan Fees were $(491,045), $(109,217), and $851,355 for the years ended December 31,
2010, 2009, and 2008 respectively. Loans are gross of the allowance for possible loan losses.

(d)

Represents net interest income as a percentage of average interest-earning assets (tax-equivalent).

(e)

Non-accrual loans have been included in total loans for purposes of total interest earning assets.

The Volume and Rate Variances table below sets forth the dollar difference in interest earned or paid for
each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are
equal to the increase or decrease in average balance multiplied by prior period rates, and rate variances are equal to the increase or decrease in rate times prior period average balances. Variances attributable to both rate and volume changes are
calculated by multiplying the change in rate by the change in average balance, and have been allocated to the rate variance.

Volume & Rate Variances

Years Ended December 31,

2010 over 2009

2009 over 2008

Increase(decrease) due to

Increase(decrease) due to

(dollars in thousands)

Volume

Rate

Net

Volume

Rate

Net

Assets:

Investments:

Federal funds sold / Due from time

$

28

(74

)

$

(46

)

$

187

(169

)

$

18

Taxable

2,312

(2,587

)

(275

)

826

(468

)

358

Non-taxable (1)

306

(73

)

233

126

(18

)

108

Total Investments

2,646

(2,734

)

(88

)

1,139

(655

)

484

Loans:

Agricultural

(116

)

2

(114

)

68

(171

)

(103

)

Commercial

(1,513

)

178

(1,335

)

142

(2,008

)

(1,866

)

Real Estate

(2,402

)

(1,223

)

(3,625

)

(2,988

)

(2,561

)

(5,549

)

Consumer

(956

)

68

(888

)

54

(471

)

(417

)

Direct Financing Leases

(236

)

(29

)

(265

)

(268

)

(73

)

(341

)

Total Loans and Leases

(5,223

)

(1,004

)

(6,227

)

(2,992

)

(5,284

)

(8,276

)

Total Interest Earning Assets

$

(2,577

)

$

(3,738

)

$

(6,315

)

$

(1,853

)

$

(5,939

)

$

(7,792

)

Liabilities

Interest Bearing Deposits:

NOW

$

304

810

$

1,114

$

89

69

$

158

Savings Accounts

24

(17

)

7

25

(58

)

(33

)

Money Market

79

(1,051

)

(972

)

361

(1,031

)

(670

)

CDARS

(1,067

)

(516

)

(1,583

)

2,462

(1,766

)

696

Certificates of Deposit < $100,000

618

(1,179

)

(561

)

(50

)

(1,769

)

(1,819

)

Certificates of Deposit > $100,000

(93

)

(806

)

(899

)

561

(3,097

)

(2,536

)

Brokered Deposits

(1,018

)

(7

)

(1,025

)

(290

)

(917

)

(1,207

)

Total Interest Bearing Deposits

(1,153

)

(2,766

)

(3,919

)

3,158

(8,569

)

(5,411

)

Borrowed Funds:

Federal Funds Purchased

(1

)



(1

)

(336

)

(5

)

(341

)

Repurchase Agreements

(35

)



(35

)

(40

)

(19

)

(59

)

Short Term Borrowings

(79

)

(120

)

(199

)

(2,419

)

(113

)

(2,532

)

Long Term Borrowings

(216

)

22

(194

)

(121

)

42

(79

)

TRUPS



(180

)

(180

)



(730

)

(730

)

Total Borrowed Funds

(331

)

(278

)

(609

)

(2,916

)

(825

)

(3,741

)

Total Interest Bearing Liabilities

$

(1,484

)

$

(3,044

)

$

(4,528

)

$

242

$

(9,394

)

$

(9,152

)

Net Interest Income

$

(1,093

)

$

(694

)

$

(1,787

)

$

(2,095

)

$

3,455

$

1,360

(1)

Yields on tax exempt income have not been computed on a tax equivalent basis.

For 2010 relative to 2009, the negative variance in the Companys net interest income attributable purely to volume changes was $1.093 million, and there was also an unfavorable rate variance of
$694,000. The negative volume variance was due in part to the fact that average interest-earning assets declined by $11 million, or 1%, for the comparative periods. Furthermore, the average balances of lower-yielding investments, OREO, and
nonperforming loans increased while average performing loan balances declined, although that unfavorable shift was partially offset by relatively strong growth in the average balance of low-cost non-maturity deposits and equity.

While there was not a significant change in market interest rates during 2010, the weighted average yield on earning assets fell and average funding
rates also declined, albeit to a lesser degree, and we experienced a negative rate variance. Our weighted average yield on interest-earning assets was 47 basis points lower in 2010 than in 2009,

relative to a 45 basis point drop in our weighted average cost of interest-bearing liabilities. The lower yield on earning assets in 2010 is due primarily to the addition of investment securities
in a relatively low-rate environment. The average cost of interest-bearing liabilities was lower due mainly to a shift away from higher-cost borrowed funds and an improving deposit mix, although we did see an increase in the cost of NOW deposits
resulting from growth in our relatively high-rate Reward Checking product. Because the average balance of interest-earning assets was $242 million greater than the average balance of interest-bearing liabilities in 2009, the base period for the rate
variance calculation, the yield decrease for interest-earning assets was applied to a much higher balance than the rate decrease for interest-bearing liabilities and thus had a greater impact on net interest income. Net interest reversals of
$566,000 in 2010 and $148,000 in 2009 also impacted loan yields and the relative level of net interest income for the comparative years.

The
Companys net interest margin, which is tax-equivalent net interest income as a percentage of average interest-earning assets, is affected by the same factors discussed above relative to rate and volume variances. Our net interest margin was
4.90% in 2010, a decline of 10 basis points relative to 2009. The principal negative pressures on our net interest margin in 2010 came from the $418,000 increase in net interest reversals and the unfavorable shift in average asset balances. Having a
positive impact for the year over year comparison were increases of $25 million in average equity and $17 million in average non-interest bearing demand deposit balances, which reduced our reliance on interest-bearing liabilities. Despite the recent
steepening of the yield curve and reductions in nonperforming assets, which would typically be expected to have a favorable impact on our net interest margin, we expect that our margin could continue to experience slight contraction due to
heightened competitive pressures on loan yields and the possibility that loan balances could continue to decline.

Changes in average balances
in 2009 relative to 2008 created a negative $2.095 million volume variance in net interest income for the comparative periods. While average interest-earning assets grew $24 million, all of the growth was in investments which have a lower weighted
average yield than loans and leases. Average loan balances fell by $5 million, and there was a major shift within that category to nonperforming loans as a large number of real estate loans were placed on non-accrual status in 2009. The average
balance of foreclosed assets was also $11 million higher in 2009 than in 2008. Having a favorable impact on the volume variance in 2009, although not enough to offset the negatives noted above, was the runoff of borrowed funds and relatively strong
growth in core deposits.

The favorable rate variance of $3.455 million in 2009 over 2008 was partly the result of a sharp decline in net
interest reversals. The Company had net interest reversals of only $148,000 in 2009, relative to $1.958 million in 2008. Another $640,000 of the favorable rate variance in 2009 came from the allocation of the variance attributable to both rate and
volume changes. The remainder is due simply to the fact that in a declining interest rate environment, our cost of interest-bearing liabilities fell by 100 basis points for the comparative periods while our yield on earning assets dropped only 95
basis points, excluding the impact of interest reversals. The relatively larger drop in the average rate paid on interest-bearing liabilities in 2009 was due in part to an easing of competitive pressures on deposits.

In 2009 our tax-equivalent net interest margin was 5.00%, relative to 4.98% in 2008. On the surface it would appear that our net interest margin was
quite stable for the comparative periods, but if interest reversals are backed out it shows a 13 basis point decline. This is due to the fact that the unfavorable pressure created by an increase in average nonperforming loans wasnt quite
offset by the favorable effect of declining interest rates and the positive impact of a higher level of customer deposits.

Provision
for Loan and Lease Losses

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan and
lease losses through periodic charges to earnings, which are reflected in the income statement as the provision for loan and lease losses. These charges are in amounts sufficient to achieve an allowance for loan and lease losses that, in
managements judgment, is adequate to absorb probable loan losses related to specifically-identified impaired loans, as well as probable incurred loan losses in the remaining loan portfolio. Specifically identifiable and quantifiable losses are
immediately charged off against the allowance. This process can create a high degree of variability in the Companys earnings. The Companys policies for monitoring the adequacy of the allowance and determining loan

amounts that should be charged off, and other detailed information with regard to changes in the allowance, are discussed below under Allowance for Loan and Lease Losses.

The Companys provision for loan and lease losses was $16.680 million in 2010, $21.574 million in 2009, and $19.456 million in 2008. The severity of
recent economic challenges has contributed to a much higher provision for the past three years than recorded in prior periods of strong economic growth, since the recession has had a material impact on many of our borrowers and led to credit
deterioration in our loan portfolio. The loan loss provision is impacted by the level of loan charge-offs, since charge-offs affect historical loss factors used in determining general reserves and could necessitate reserve replenishment. Net loans
charged off totaled $19.257 million in 2010, relative to $12.953 million in 2009 and $16.638 million in 2008. Charge-offs were relatively high in 2010 because reserves that had been established in previous periods for specifically-identified losses
on certain impaired loans were determined to be uncollectible and written off. Charge-offs were also high in 2008, because they include write-downs on certain collateral-dependent nonperforming real estate loans with quantifiable losses that were
identified as uncollectible.

The Companys loan loss provision was reduced by $4.894 million, or 23%, in 2010 relative to 2009 despite a
higher level of charge-offs, since the many of the charge-offs were against reserves that were already reflected in the allowance at the beginning of the year, as noted above. Our loan loss provision in 2010 was primarily utilized to build general
reserves for performing loans due to higher historical loss factors, provide specific reserves for loans that migrated into impaired status, and replenish reserves subsequent to loan charge-offs. In 2009 the level of loan balances charged off was
lower than in 2008, but the provision for loan and lease losses was $2.118 million higher due to a substantial increase in nonperforming loans and the higher loss allowance required for those loans pursuant to a detailed analysis conducted to
determine probable losses.

Non-interest Revenue and Operating Expense

The following table sets forth the major components of the Companys non-interest revenue and other operating expense, along with relevant ratios, for the years indicated:

The overhead efficiency ratio in the table
above represents total operating expense divided by the sum of fully tax-equivalent net interest and non-interest income, with the provision for loan losses, investment gains and losses, and other extraordinary gains and losses excluded from the
equation. Since total other operating expense increased by 14% in 2010 relative to an increase of only 3% in non-interest revenue and a drop of 3% in net interest income, our efficiency ratio rose to 66.64% in 2010, from 57.69% in 2009. The jump in
2009 relative to 2008 is also due to a disproportionate increase in non-interest expense in 2009.

The Companys results reflect an
increase of $582,000, or 3%, in total non-interest income for 2010 relative to 2009, which follows on the heels of a $1.292 million increase in 2009 relative to 2008. While the primary reasons for these increases are discussed in greater detail
below, several items of a non-recurring nature have impacted net interest income over the past few years. For 2010, those items include $2.643 million in gains on investment securities, net losses on the disposition of foreclosed assets totaling
$1.536 million, and $238,000 in losses incurred upon the disposition of equipment that was acquired subsequent to the termination of operating leases. In 2009, non-recurring items include $1.099 million in gains on securities, $204,000 in losses on
OREO sales, and a $66,000 recovery on a

previously charged-off investment in a title insurance holding company, while in 2008 there were numerous non-recurring items netting out to $939,000 in additional non-interest income. Total
non-interest revenue increased to 1.52% of average earning assets in 2010, from 1.46% in 2009 and 1.37% in 2008.

The principal component of
non-interest income, service charges on deposit accounts, declined by $340,000, or 3%, in 2010 relative to 2009, despite a $51 million increase in transaction account balances and an increase of 8% in the number of transaction accounts during 2010.
The drop in service charges is due in large part to the impact of new consumer legislation requiring customer opt-in for point-of-sale overdrafts, which became fully effective in mid-August 2010. Furthermore, in the fourth quarter of 2010, the
Banks primary regulator issued guidance that limits our flexibility with regard to allowing and charging for consumer overdrafts. Operational changes made by the Bank pursuant to this guidance led to further declines in service charge income
toward the end of 2010, and will continue to have an unfavorable effect on income going forward, although the full extent of that impact has not yet been determined. Deposit service charges increased by $349,000, or 3%, in 2009 over 2008, due to the
fact that the number of transaction accounts (demand and interest-bearing NOW accounts) increased by over 5,000, or 11%, in 2009. Despite a fee increase that became effective mid-2008, the increase in total service charges is proportionately smaller
than the increase in the number of accounts since each account, on average, generated a lower volume of returned item and overdraft charges in 2009. It is our assumption that consumers and businesses have learned to manage cash more carefully in
this difficult economy. The Companys ratio of service charge income to average transaction account balances was 2.6% in 2010, down from 3.3% in 2009 and 3.4% in 2008.

The next line item under non-interest revenue is credit card fees, which consist primarily of credit card interchange fees. Despite the sale of all credit card balances in 2007, we still receive a portion
of the interchange and interest from credit cards issued in our name, and credit card fees totaled $391,000 in 2010, $417,000 in 2009, and $494,000 in 2008. Credit card fees fell by $26,000, or 6%, in 2010 relative to 2009, and also declined by
$77,000, or 16%, in 2009 relative to 2008, due to declining consumer credit card usage in a difficult economic environment. These fees were only 2% of total non-interest income in 2010 and 2009, down from 3% in 2008.

Check card fees, which represent interchange fees from electronic funds transactions (EFT), increased by $479,000, or 27%, in 2010 relative to 2009, and
by $225,000, or 14%, in 2009 over 2008. The increase is from fees earned on incremental cards issued in association with new retail deposit accounts, as well as increased usage per card. Check card fees have been increasing as a percentage of total
non-interest revenue, and the rising popularity of point-of-sale transactions leads us to believe that this access channel will continue to grow in importance. The number of active check cards now in use by personal and business account holders is
close to 45,000, up from approximately 40,000 at the end of 2009.

Other service charges and fees also constitute a large portion of
non-interest income, with the principal components consisting of operating lease income, dividends received on restricted stock (primarily our equity investment in FHLB stock), currency order fees, and ATM fees from transactions not associated with
deposit customers (also referred to as foreign ATM fees). This category is also where rental income on OREO properties is reflected. Other service charges, commissions, and fees totaled $2.260 million in 2010, $2.198 million in 2009, and $3.066
million in 2008. They increased by $62,000, or 3%, in 2010 relative to 2009, due to increases in OREO rental income and merchant fees. In contrast, they declined by $868,000, or 28%, in 2009 relative to 2008, in large part because of a $523,000 drop
in dividends on restricted stock. The FHLB of San Francisco suspended dividend payments at the beginning of 2009 to preserve capital, but has currently reinstated dividends at a nominal level. Non-recurring income in 2008, including a $289,000 gain
on VISA stock and a $75,000 contingent payment related to merchant services (both included in the total non-recurring number for 2008 noted above), also contributed to the decline in other service charges in 2009.

Bank-owned life insurance (BOLI) income was $1.382 million, relative to $1.561 million in 2009 and $408,000 in 2008. It fell by $179,000, or 11%, in 2010
relative to 2009, but increased by $1.153 million, or 283%, in 2009 relative to 2008. To understand the reason for these variances, one needs to distinguish between the two basic types of BOLI owned by the Company: general account, and
separate account. At December 31, 2010, the Company had $28.9 million invested in single-premium general account BOLI. Income from our general account BOLI is used to fund expenses associated with executive salary continuation plans
and director retirement plans, and is typically

fairly consistent with interest credit rates that do not change frequently. The exchange of select general account policies in the third quarter of 2009 generated a one-time gain of approximately
$72,000, however, which contributed to the overall decline in BOLI income in 2010 relative to 2009. In addition to general account BOLI, the Company had $2.7 million invested in separate account BOLI at December 31, 2010, the earnings on which
help offset deferred compensation accruals for certain directors and senior officers. These deferred compensation accounts have returns pegged to participant-directed investment allocations which can include equity, bond, or real estate indices, and
are thus subject to gains or losses. These plans are designed to be revenue-neutral to the Company: Participant gains are accounted for as expense accruals which, combined with their associated tax effect, generally counterbalance income on separate
account BOLI, while participant losses result in expense accrual reversals that typically offset losses on separate account BOLI. The decline in aggregate BOLI income in 2010 includes a drop of $111,000 in separate account BOLI income. Total BOLI
income increased in 2009 mainly because of gains on separate account BOLI in 2009 relative to a loss for 2008, resulting in a swing in separate account BOLI income of $1.078 million for the comparative periods. With the exception of a one-time gain
of about $350,000 on separate account BOLI policy exchanges in the third quarter of 2008, which offset what otherwise would have been a loss for that period, these gains and losses are related to participant gains and losses on deferred compensation
balances.

Gains on loan sales totaled $105,000 in 2010, $81,000 in 2009, and only $9,000 in 2008. Our affiliation with PHH Mortgage, the
primary outlet for our mortgage loan sales, was terminated in early 2011 due to low loan sale volume and an expected increased compliance burden, thus our loan sale income is likely to diminish significantly in 2011.

In 2010 and 2009, gains on the sale of investments totaling $2.643 million and $1.099 million, respectively, represent significant additions to income.
The investment gains in 2010 were taken pursuant to a portfolio restructuring in the third quarter that involved the sale of $64 million in mortgage-backed securities, with the proceeds reinvested in agency-issued mortgage-backed securities that
have a slightly longer duration and slightly lower yield. Management estimates that as a result of the sale the overall tax-equivalent yield of the portfolio declined by 31 basis points, while the effective duration increased from 1.68 to 1.83.
Furthermore, by selling bonds that had declined to relatively small balances due to prepayments, and reinvesting in securities with larger balances, the structure of the portfolio was improved and lends itself to more efficient management. For 2009,
gains were taken on the sale of $30 million in mortgage-backed securities. As in 2010, we reinvested the proceeds in high-quality agency-issued mortgage-backed securities, with the overall transaction increasing the duration of our investment
portfolio but slightly lowering the overall yield. The gain on investments in 2009 also includes small gains on bonds called prior to maturity, and a non-recurring $66,000 recovery on a previously charged-off investment in a title insurance holding
company.

The next line item reflects pass-through losses associated with our partnership investments in low-income housing tax credit funds.
These costs, which are accounted for as a reduction of income, totaled $808,000 in 2010, relative to $1.443 million in 2009 and $1.242 million in 2008. They declined by $635,000, or 44%, in 2010 relative to 2009, but increased by $201,000, or 16%,
in 2009 relative to 2008. While these expenses are typically expected to be around $1.2 million per year, the fluctuations are due to expense accrual adjustments made subsequent to the receipt of updated partnership financial statements.

Other non-interest income includes gains and losses on the disposition of real properties and other assets, and rental income generated by the
Companys alliance with Investment Centers of America (ICA). Other non-interest income declined by $1.617 million in 2010 relative to 2009, and was $402,000 lower in 2009 than in 2008. The primary reason for the lower level in 2010 is $1.536
million in net losses on the sale of foreclosed assets, which is $1.332 million higher than in 2009. A non-recurring $238,000 loss on the disposition of equipment acquired upon the termination of operating leases in 2010 was also a factor in the
decline. The drop in 2009 is due in part to a $266,000 increase in OREO losses and a $45,000 decline in ICA income. The 2009 over 2008 difference was also impacted by a non-recurring $82,000 gain on the sale of real property adjacent to one of our
branches in 2008.

Total operating expense (non-interest expense) was $50.2 million for 2010, relative to $44.1 million in 2009 and $35.9
million in 2008. This represents an increase of $6.1 million, or 14%, for 2010 over 2009, with the majority of the increase coming in OREO write-downs and compensation expense, as discussed in greater detail below. The increase in 2009 over 2008 was
$8.3 million, or 23%, and was primarily caused by higher employee compensation costs, a substantial increase in FDIC assessments, and a large jump up in credit-related costs.

Non-interest expense includes the following significant non-recurring items, which net out to additional
expense of $5.120 million in 2010, $1.857 million in 2009, and $337,000 in 2008: OREO write-downs totaling $5.045 million in 2010, $1.265 million in 2009 and $463,000 in 2008; the payment of $592,000 in 2009 for an industry-wide special FDIC
assessment; a $75,000 legal settlement on an operations-related issue paid in 2010; a legal settlement and non-recurring operations-related loss totaling $191,000 in 2008; a $54,000 insurance recovery from a prior-year check fraud loss in 2008;
expenses totaling $83,000 associated with the initiation of a mortgage lending platform in 2008; and, expense reductions totaling $346,000 in the form of incentive payments/expense reimbursements from certain vendors in 2008, in conjunction with our
debit card and EFT processing conversions in the previous year. Total operating expense increased to 4.27% of average earning assets in 2010, from 3.72% in 2009 and 3.08% in 2008.

The largest component of operating expense, salaries and employee benefits, increased by $1.906 million, or 10%, in 2010 over 2009, and by $2.297 million, or 14%, in 2009 relative to 2008. The biggest
contributing factor to the increase in 2010 was our accrual for incentive compensation, which was $1.343 million in 2010 relative to zero in 2009, when the Companys net income did not reach the level necessary to trigger bonus payments. Adding
to salaries and benefits in 2010 and 2009 were normal annual salary adjustments, staffing costs associated with recently-opened branches, and strategic staff additions to help address credit issues and position the Company for future growth
opportunities. Compensation costs in 2010 also include severance costs associated with selective staff reductions. The increase in 2010 over 2009 was also supplemented by a lower level of salaries deferred and amortized as an adjustment to loan
yields, pursuant to FASB guidelines on the recognition and measurement of nonrefundable fees and origination costs associated with lending activities. Salaries deferred for this purpose fell to $2.376 million in 2010, from $2.554 million in 2009 and
$3.415 million for 2008, due to lower loan origination activity. Also contributing to fluctuations in salaries and benefits are accruals associated with employee deferred compensation plans. As noted above in our discussion of BOLI income, employee
deferred compensation accruals are related to separate account BOLI income and losses, as are directors deferred compensation accruals that are included in other professional services, and the net income impact of all income/expense
accruals related to deferred compensation is usually minimal. Gains on employee plans totaled $206,000 in 2010 and $237,000 in 2009, relative to a loss of $530,000 in 2008. In fact, the single largest contribution to the increase in compensation
costs in 2009 came from the $767,000 swing in deferred compensation accruals. Partially offsetting the aforementioned increases in compensation-related costs in 2009 over 2008 was a $675,000 drop in incentive compensation costs, which were accrued
at a reduced level in 2008 and, as noted above, were non-existent in 2009. Salaries and benefits were 41.54% of total operating expense in 2010, relative to 37.75% in 2009 and 46.48% in 2008. The large drop in the percentage in 2009 relative to 2008
came despite a substantial increase in actual expense, due to the relatively large increases in FDIC costs and credit-related costs in 2009. The number of full-time equivalent staff employed by the Company was 390 at the end of 2010, 402 at the end
of 2009, and 388 at the end of 2008.

Total rent and occupancy costs, including furniture and equipment expenses, increased by $90,000, or 1%,
in 2010 in comparison to 2009, and by $443,000, or 7%, in 2009 over 2008. Furniture and equipment expense was actually lower in both 2010 and in 2009 due to declining depreciation expense and lower maintenance and repair costs for furniture and
equipment, but premises costs were higher. The increases in premises expense were primarily caused by costs associated with our new branches, annual rental increases for our other branches, and the rising cost of insurance and utilities.

Advertising and marketing costs were up by $107,000, or 6%, in 2010 compared to 2009, but fell by $417,000, or 18%, in 2009 relative to 2008. The
increase in 2010 is mainly due to costs associated with our debit rewards program and an increase in radio advertising, while the decline in 2009 is mainly the result of streamlined marketing efforts. It should be noted that our highly successful
direct-mail marketing campaign for deposits continues in full force.

Data processing costs increased $331,000, or 24% in 2010 relative to
2009, and by $95,000, or 7%, in 2009 relative to 2008. The increase in 2010 was centered in internet banking costs and software maintenance fees. The increase in 2009 is also the result of higher internet banking costs, which have risen as we have
encouraged higher usage of this access channel to promote better customer retention.

Deposit services costs increased by $520,000, or 24%, in 2010 relative to 2009, and by $429,000, or 24%, in
2009 over 2008. The increase in 2010 is due to higher expenses associated with our online checking product, ATM servicing, check card processing, and remote deposit capture. Operational costs associated with the launch and maintenance of our online
deposit product, Reward Checking, totaled $98,000 in 2009 and contributed to the increase in deposit costs for that year. The variance for 2009 over 2008 was also impacted by non-recurring expense reductions of $346,000 in 2008 related to our EFT
processing and debit card conversions, and a $54,000 insurance recovery in 2008.

Loan services costs, including expenses associated with
foreclosed assets, credit card costs, and other loan processing costs, increased by $4.146 million, or 149%, in 2010 over 2009, and by $1.535 million, or 123%, in 2009 over 2008. For 2010, the increase is due to a $3.780 increase in write-downs on
foreclosed assets (primarily OREO), as we adjusted carrying values pursuant to changing market conditions and updated appraisals, and a $560,000 increase in OREO operating expense. For 2009, the major cause of the increase was also an $801,000
increase in write-downs on foreclosed assets. Write-downs on foreclosed assets totaled $5.045 million in 2010, relative to $1.264 million in 2009 and $463,000 in 2008. Operating expenses associated with foreclosed assets totaled $1.123 million in
2010, in comparison to $563,000 in 2009 and $115,000 in 2008. Also contributing to the increase in loan costs in 2009 over 2008 were increases of $155,000 in foreclosure costs and $118,000 in appraisal costs.

The other operating costs category, including telecommunications expense, postage, and other miscellaneous costs, totaled $2.773 million in
2010, $2.648 million in 2009, and $2.546 million in 2008. Telecommunications expense increased by $49,000, or 4%, in 2010, and by $139,000, or 14%, in 2009. The relatively large increase in 2009 was due to network upgrades in early 2009, costs
associated with new branches, and enhanced circuit redundancy. Postage expense increased by $57,000, or 11%, in 2010, and by $32,000, or 7%, in 2009. The increases in 2010 and 2009 include increases associated with a growing customer base, and
postage in 2010 also includes additional mailings for newly-required regulatory compliance disclosures. Other miscellaneous costs did not reflect a material change in either 2010 or 2009.

Legal and accounting costs declined by $261,000, or 17%, in 2010 over 2009, but increased by $147,000, or 11%, in 2009 over 2008. Legal and accounting costs were lower in 2010 mainly because of enhanced
staffing in the collections area which enabled a reduction in lending-related legal expense, but also due to a reduction in expenses associated with compliance and operations reviews. For 2009, the increase is attributable to legal costs associated
with collections, which were up by $148,000, as well as higher operational, compliance and loan review costs, although those increases were partially offset by lower external audit costs and a drop in other legal costs.

Other professional service expense includes FDIC assessments and other regulatory costs, directors costs, certain insurance costs, and certain
shareholder expenses. This category declined by $843,000, or 18%, in 2010 over 2009, but shows the largest increase of any non-interest expense category in 2009, rising by $3.7 million relative to 2008. The large fluctuations are centered on
accruals for FDIC assessments, which totaled $2.214 million in 2010, $3.155 million in 2009 including the special FDIC assessment of $592,000, and only $323,000 in 2008. In addition to the special assessment, the increase in 2009 reflects an
increase in our assessment base and rising regular assessment rates as the FDIC attempts to recapitalize the Deposit Insurance Fund. The variance in other professional service expense also includes an $86,000 reduction in directors deferred
fee expense accruals in 2010 and a $796,000 increase in 2009. As with deferred compensation accruals for employees, directors deferred fee accruals are related to separate account BOLI income and losses, and the net income impact of all
income/expense accruals related to deferred compensation is usually minimal.

Stationery and supply costs were up $40,000, or 6%, in 2010, but
declined by $78,000, or 10%, in 2009. The increase in 2010 is primarily due to supplies purchased for recently-added branches, plus inflationary increases in the cost of supplies. The drop in 2009 is the result of an internal review conducted and
subsequent changes implemented to increase efficiencies and lower costs with regard to forms, brochures, and other supplies. Sundry and teller costs fell by $65,000, or 12%, in 2010, but increased by $62,000, or 13%, in 2009. The decline in 2010 is
from reductions in debit card losses due to enhanced anti-fraud efforts, and a lower level of other sundry losses despite a $75,000 non-recurring legal settlement paid in 2010. The increase in 2009 is from higher debit card losses, which were
partially offset by declines related to a non-recurring legal settlement and a non-recurring operations-related loss in 2008.

The Company sets aside its provision for income taxes on a monthly basis. As indicated in Note 9 in the Notes to the Consolidated Financial Statements, the amount of such provision is determined by
applying the Companys statutory income tax rates to pre-tax book income as adjusted for permanent differences between book income and actual taxable income. These permanent differences include, but are not limited to, tax-exempt interest
income, increases in the cash surrender value of BOLI (BOLI income), California Enterprise Zone deductions, and certain book expenses that are not allowed as tax deductions. Tax-exempt interest income is generated primarily by the Companys
investments in state, county and municipal bonds, which provided $2.7 million in federal tax-exempt income in 2010, $2.5 million in 2009, and $2.4 million in 2008. Tax credits, including hiring tax credits as well as those stemming from our
investments in low-income housing tax credit funds, are applied as a direct reduction to our tax liability for both book and tax purposes. The company had investments totaling $10.3 million in low-income housing tax credit funds as of
December 31, 2010. These investments, which are included in other assets rather than in our investment portfolio, have generated substantial tax credits over the past few years, with about $1.7 million in credits available for the 2010 tax year
and $1.7 million in tax credits realized in 2009. The investments are expected to generate an additional $7.3 million in aggregate tax credits from 2011 through 2018. The credits are dependent upon the occupancy level of the housing projects and
income of the tenants, however, and cannot be projected with complete certainty. Furthermore, our capacity to utilize them will continue to depend on our ability to generate sufficient pre-tax income.

A negative income tax provision of $234,000, resulting from a high level of tax credits relative to our pre-credit tax liability as calculated for book
purposes, helped boost net income in 2010. While our level of tax credits did not change materially relative to the prior year, our tax liability declined due to a drop in pre-tax income, as adjusted for the permanent differences noted above. The
Companys provision for federal and state income taxes was $608,000 in 2009 and $3.868 million in 2008. This represents 6% of income before taxes in 2009, and 22% in 2008. The accrual rate declined significantly in 2009 relative to 2008, due to
the relatively larger impact of tax credits and non-taxable income on a lower level of pre-tax income.

In addition to permanent differences,
some income and expense items are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Companys actual tax liability and the amount accrued for
this liability based on book income. These temporary differences comprise the deferred portion of the Companys tax expense, which is accumulated on the Companys books as a deferred tax asset or deferred tax liability until
such time as it reverses. At the end of 2010, the Company had a net deferred tax asset of $13.5 million.

Financial Condition

Total assets of $1.287 billion at the end of 2010 reflect a drop of $49 million, or 4%, for the year, due primarily to declining loan
balances partially offset by growth in investments. In 2009, we experienced a drop of $62 million in gross loan balances, as well. In addition to loan growth challenges for the past three years, we saw marked deterioration in asset quality in 2009
and 2008, coincidental with the decline in the economy. Despite growth challenges and relatively high levels of nonperforming assets, our capital position was greatly strengthened due to our registered direct offering in 2010 and private placement
in 2009, as well as positive net income in both years. Furthermore, our liquidity position has significantly improved over the past couple of years due to strong growth in customer deposits and the runoff of a large volume of wholesale-sourced
brokered deposits and other borrowings, as well as a drop in loan balances and substantial increase in unpledged investments. Our strong capital position and access to liquidity resources position us well to endure to the end of the current cycle
and eventually return to previous levels of loan growth, although no assurance can be provided in that regard.

Significant changes in the
relative size of balance sheet components in 2010 include net loans and leases, which fell to 61% of total assets at the end of 2010 from 64% at the end of 2009, and investment securities, which increased to 26% of total assets at the end of 2010
from 21% at the end of 2009. On the liability side, non-maturity deposits increased to 63% of total deposits at the end of 2010 from 54% at the end of 2009, while jumbo customer time deposits and CDARS dropped to 21% of total deposits at
December 31, 2010 from 30% at December 31, 2009. Wholesale-

sourced brokered deposits fell to zero by year-end 2010, from 2% of total deposits at the end of 2009. Because of the aforementioned capital raise, shareholders equity increased to 12% of
total liabilities and shareholders equity at December 31, 2010, from 10% at December 31, 2009. The major components of the Companys balance sheet are individually analyzed below, along with information on off-balance sheet
activities and exposure.

Loan and Lease Portfolio

The Companys loan and lease portfolio represents the single largest portion of invested assets, substantially greater than the investment portfolio or any other asset category, and the quality and
diversification of the loan and lease portfolio are important considerations when reviewing the Companys financial condition. The Company is not involved with chemicals or toxins that might have an adverse effect on the environment, thus its
primary exposure to environmental legislation is through its lending activities. The Companys lending procedures include steps to identify and monitor this exposure in an effort to avoid any related loss or liability. The Selected Financial
Data table in Item 6 above reflects the amount of loans and leases outstanding at December 31st for each year from 2006 through 2010, net of deferred fees and origination costs and the allowance for loan and lease losses. The Loan and Lease Distribution table that follows sets forth by loan type
the Companys gross loans and leases outstanding, and the percentage distribution in each category at the dates indicated. The gross balances shown include nonperforming loans by type, but do not reflect any deferred or unamortized loan
origination, extension, or commitment fees, or deferred loan origination costs.

Loan and Lease Distribution

As of December 31,

(dollars in thousands)

2010

2009

2008

2007

2006

Agricultural

$

13,457

$

9,865

$

13,542

$

13,103

$

13,193

Commercial and Industrial

94,768

116,835

122,856

117,183

113,644

Real Estate:

Secured by Commercial/Professional Office

Properties including const. and development

308,470

421,114

456,932

457,236

420,973

Secured by Residential Properties

252,203

188,750

189,849

187,267

177,448

Secured by Farmland

61,293

56,654

57,808

51,607

53,668

Held for Sale

914

376

552





Total Real Estate

622,880

666,894

705,141

696,110

652,089

Small Business Administration loans

18,616

18,626

19,463

20,366

25,946

Consumer Loans

45,585

56,992

65,755

54,731

54,568

Direct Financing Leases

10,234

15,394

19,883

23,140

20,150

Consumer Credit Cards









8,418

Total Loans and Leases

$

805,540

$

884,606

$

946,640

$

924,633

$

888,008

Percentage of Total Loans and Leases

Agricultural

1.67

%

1.12

%

1.42

%

1.42

%

1.49

%

Commercial and Industrial

11.77

%

13.21

%

12.97

%

12.67

%

12.80

%

Real Estate:

Secured by Commercial/Professional Office

Properties including const. and development

38.29

%

47.60

%

48.27

%

49.45

%

47.41

%

Secured by Residential Properties

31.31

%

21.34

%

20.06

%

20.26

%

19.98

%

Secured by Farmland

7.61

%

6.40

%

6.11

%

5.58

%

6.04

%

Held for Sale

0.11

%

0.04

%

0.06

%

0.00

%

0.00

%

Total Real Estate

77.32

%

75.38

%

74.50

%

75.29

%

73.43

%

Small Business Administration loans

2.31

%

2.11

%

2.06

%

2.20

%

2.92

%

Consumer Loans

5.66

%

6.44

%

6.95

%

5.92

%

6.14

%

Direct Financing Leases

1.27

%

1.74

%

2.10

%

2.50

%

2.27

%

Consumer Credit Cards

0.00

%

0.00

%

0.00

%

0.00

%

0.95

%

100.00

%

100.00

%

100.00

%

100.00

%

100.00

%

The Companys gross loans and leases totaled $806 million at the end of December 2010, a drop of $79 million, or 9%,
since December 31, 2009. Loan balances have been declining because of runoff in the normal course of business

(including prepayments), charge-offs, transfers to OREO, and the sale of certain substandard loans. Furthermore, loan origination activity in our branches has been light due to weak demand from
creditworthy borrowers, tightened credit criteria for real estate loans, and increased attention devoted to monitoring and managing current loan relationships. Management has realigned branch objectives in order to place additional emphasis on
high-quality loan growth, with a particular focus on commercial loans, but no assurance can be provided that loan balances will not continue to decline, especially in the near term.

Agricultural production loans reflect a timing-related increase of close to $4 million relative to their year-end 2009 balance, and SBA loans were about even, but balances declined in the real estate,
commercial, direct finance lease, and consumer loan categories. While there was a decline in aggregate commercial real estate loan balances, within that category non-owner occupied commercial real estate loans increased by $15 million, or 14%, and
multi-family residential loans increased by $3 million, or 34%, due to the completion of construction projects and the reclassification of associated loans as permanent loans. Construction and development loans were down by $48 million. Commercial
loans and consumer loans also experienced fairly substantial drops during 2010, declining by $22 million, or 19%, and $11 million, or 20%, respectively. For both commercial and consumer loans the decline is primarily the result of flagging demand,
but it also includes $5 million in commercial loan charge-offs and $4 million in consumer loan charge-offs. Direct finance lease balances dropped by over $5 million, or 34%, in 2010. As a result of these changes, real estate loans increased to 77%
and commercial loans fell to 12% of total loans at the end of 2010, from 75% and 13%, respectively, at the end of 2009.

Our total investment
in impaired loans was $71 million at December 31, 2010. Pursuant to FASBs impairment accounting guidance, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to
collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include all nonperforming loans, as well as certain other loans that are still being maintained on accrual status including performing
restructured troubled debt.

Although not reflected in the loan totals above, the Company occasionally originates and sells, or participates
out portions of, certain commercial real estate loans, agricultural or residential mortgage loans, and other loans to non-affiliated investors, and we currently provide servicing for some of those loans including a small number of SBA loans. The
balance of loans serviced for others fell to less than $5 million at December 31, 2010 from $8 million at December 31, 2009, with the decline resulting primarily from winding down servicing for agricultural mortgage loans that had been
previously sold by the Company with servicing rights retained.

Loan and Lease Maturities

The following table shows the maturity distribution for total loans and leases outstanding as of December 31, 2010, including non-accruing loans,
grouped by remaining scheduled principal payments.

Loan and Lease Maturity

As of December 31, 2010

(dollars in thousands)

Threemonthsor less

Threemonthsto twelvemonths

Oneto fiveyears

Overfive years

Total

Floatingrate:due afterone
year

Fixedrate:due afterone year

Agricultural

$

2,664

$

7,715

$

2,583

$

495

$

13,457

$

770

$

1,263

Commercial and Industrial (1)

17,945

41,952

38,878

14,609

113,384

13,842

137,755

Real Estate

27,160

35,356

151,418

408,946

622,880

336,585

130,175

Consumer Loans

4,853

7,265

12,090

21,377

45,585

30,256

3,514

Direct Financing Leases

375

513

5,623

3,723

10,234



9,346

TOTAL

$

52,997

$

92,801

$

210,592

$

449,150

$

805,540

$

381,453

$

282,053

(1)

Includes Small Business Administration Loans

For a comprehensive discussion of the Companys liquidity position, re-pricing characteristics of the balance sheet, and sensitivity to changes in interest rates, see the Liquidity and Market
Risk section.

In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of conditions established in contractual arrangements. Total unused
commitments to extend credit were $142 million at December 31, 2010, as compared to $162 million at December 31, 2009. These numbers include $33 million in home equity lines of credit at December 31, 2010, and $36 million at
December 31, 2009. Unused commitments represented 18% of gross loans and leases outstanding at December 31, 2010 and 2009. The Companys undrawn letters of credit totaled $17 million at December 31, 2010 and $21 million at
December 31, 2009. These obligations represent potential credit risk to the Company, and a $160,000 reserve for unfunded commitments is reflected as a liability in our consolidated balance sheet at December 31, 2010.

The effect on the Companys revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be
reasonably predicted, because there is no certainty that lines of credit will ever be fully utilized. For more information regarding the Companys off-balance sheet arrangements, see Note 11 to the financial statements in Item 8 herein.

Contractual Obligations

At the end of 2010, the Company had contractual obligations for the following payments, by type and period due:

Contractual Obligations

Payments Due by Period

(dollars in thousands)

Total

Less than1 Year

1-3 Years

3-5 Years

More than 5Years

Long-term debt obligations

$

45,928

$



$

15,000

$



$

30,928

Operating lease obligations

7,428

1,119

2,585

1,621

2,103

Other long-term obligations

417

206





211

Total

$

53,773

$

1,325

$

17,585

$

1,621

$

33,242

Nonperforming Assets

Nonperforming assets are comprised of loans for which the Company is no longer accruing interest, and foreclosed assets, including mobile homes and other real estate owned. OREO consists of properties
acquired by foreclosure or similar means, which the Company is offering or will offer for sale. Nonperforming loans and leases result when reasonable doubt exists with regard to the ability of the Company to collect all principal and interest on a
loan or lease. At that point, we stop accruing interest on the loan or lease in question, and reverse any previously-recognized interest to the extent that it is uncollected or associated with interest-reserve loans. Any asset for which principal or
interest has been in default for a period of 90 days or more is also placed on non-accrual status, even if interest is still being received, unless the asset is both well secured and in the process of collection. Nonperforming assets are considered
to be impaired, as explained above in the Loan and Lease Portfolio section. If the Bank grants a concession to a borrower in financial difficulty, the loan falls into the category of a troubled debt restructuring (TDR). TDRs are
also deemed to be impaired loans, and are further classified as either nonperforming or performing loans depending on their accrual status. The following table presents comparative data for the Companys nonperforming assets and performing
TDRs:

Nonperforming assets as a % of total gross loans and leases and other real estate owned

8.07

%

7.98

%

3.87

%

1.04

%

0.08

%

(1)

The gross interest income that would have been recorded in the period ending December 31, 2010 if all non-accrual loans had been paying pursuant to their original
terms was $3,929,000, which includes $1,219,000 that was recorded and included in net income for the period.

(2)

A TDR, or troubled debt restructuring, is a loan or lease for which the terms were renegotiated to provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower.

Nonperforming assets were not at material levels in 2006, but have
escalated dramatically since then due to deterioration in economic conditions and the associated negative impact on our borrowers. Total nonperforming assets declined $6.0 million, or 8%, during 2010, due to a drop of $1.0 million, or 2%, in
nonperforming loans, and a net reduction of $5.0 million, or 19%, in foreclosed assets. The balance of nonperforming loans at December 31, 2010 includes a total of $16.6 million in TDRs which were paying as agreed under modified terms or
forbearance agreements but were still classified as nonperforming. As shown in the table, we also had $12.5 million in loans classified as performing TDRs for which we were still accruing interest at December 31, 2010, a drop of $15.6
million relative to the balance at December 31, 2009. The decline in performing TDRs is primarily the result of a single developer relationship of over $4 million in loans secured by residential properties, and a $7 million agricultural
loan secured by real estate, which are paying interest at market rates and are now well-seasoned, and were thus removed from the TDR classification in the first quarter of 2010. Additionally, during the third quarter of 2010, we moved a $3 million
loan from the performing TDR category to non-accrual status since the collection of a portion of the outstanding principal is in doubt, although the borrower is still paying interest as agreed.

Non-accruing loan balances secured by real estate comprised $38.9 million of total nonperforming loans at December 31, 2010, and reflect a net
increase of $973,000, or 3%, during 2010. Gross additions to nonperforming real estate loans totaled $42.2 million for 2010, much of which was comprised of balances secured by commercial real estate but also including relatively large increases in
the other construction/land, 1-4 family residential construction, and other 1-4 family loan categories. Offsetting some of the increase created by additional real estate loans placed on non-accrual status during
2010 were $11.9 million in transfers to OREO from nonperforming real estate loans, net pay-downs on nonperforming real estate loans of $13.1 million, $8.5 million in real estate loans that were returned to accrual status, and charge-offs of $7.7
million.

Nonperforming commercial and SBA loans declined by a combined $1.8 million, or 25%, during 2010, ending the period at $5.4 million.
Gross additions to nonperforming commercial and SBA loans totaled $7.6 million for the

year, but this was more than offset by net pay-downs of $1.8 million, the return to accrual status of $2.7 million in loans, the charge-off of $4.3 million in loan balances, and the transfer of a
small amount to foreclosed assets. Non-accrual direct finance leases declined by $552,000, or 52%, in 2010, since balances charged off exceeded net additions. Nonperforming consumer loans, which are largely unsecured, increased by a net $356,000, or
47%, to a total of $1.1 million.

The balance of foreclosed assets at December 31, 2010 had an aggregate carrying value of $20.7 million,
and was comprised of 79 parcels classified as OREO and 17 mobile homes. Much of our OREO consists of vacant lots or land, but there are also 20 residential properties totaling $2.6 million, six commercial buildings with a combined book balance of
$3.5 million, and a mini-storage unit. At the end of 2009, foreclosed assets totaled $25.7 million, comprised of 85 properties in OREO, 13 mobile homes, and a small amount of commercial equipment acquired upon the default of a lease agreement. All
foreclosed assets are periodically evaluated and written down to their fair value less expected disposition costs, if lower than the then-current carrying value.

Nonperforming assets were 8.07% of total gross loans and leases plus foreclosed assets at December 31, 2010, up slightly from 7.98% at December 31, 2009 despite the decline in nonperforming
assets due to a larger relative drop in loan balances. An action plan is in place for each of our nonperforming and foreclosed assets and they are all being actively managed. Collection efforts are continuously pursued for all nonperforming loans,
but we cannot provide assurance that all will be resolved in a timely manner or that nonperforming balances will not increase further.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses, a contra-asset, is established through a provision for loan and lease losses based on managements evaluation of probable loan losses related to certain
specifically identified impaired loans, as well as probable incurred loan losses in the remaining loan portfolio. It is maintained at a level which is considered adequate to absorb the remaining probable losses inherent in our loan portfolio, after
factoring in charge-offs taken against the allowance and recoveries credited back to the allowance. Specifically identifiable and quantifiable losses are immediately charged off against the allowance; recoveries are generally recorded only when cash
payments are received subsequent to the charge off. At December 31, 2010, the allowance for loan and lease losses was $21.1 million, or 2.62% of gross loans and leases, an 11% decline from the $23.7 million allowance at December 31, 2009
which was 2.68% of gross loans and leases. The Companys total allowance was 46.00% of nonperforming loans at December 31, 2010, relative to 50.49% at December 31, 2009. An allowance for potential losses inherent in unused
commitments, totaling $160,000 at December 31, 2010, is included in other liabilities.

We employ a systematic methodology, consistent
with FASB guidelines on loss contingencies and impaired loans, for determining the appropriate level of the allowance for loan and lease losses and adjusting it on at least a quarterly basis. Pursuant to that methodology, impaired loans and leases
are individually analyzed and a criticized asset action plan is completed specifying the financial status of the borrower and, if applicable, the characteristics and condition of collateral and any associated liquidation plan. A specific loss
allowance is created for each impaired loan, if necessary, representing the difference between the face value of the loan and either its current appraised value less estimated disposition costs, or its net present value as determined by a discounted
cash flow analysis. While we had a total of $71.0 million in impaired loans on our books at December 31, 2010, impaired loans totaling approximately $32.0 million did not require any valuation allowance either because they have already been
written down to their estimated fair values, or because the fair value of the collateral or the net present value of anticipated cash flows exceeded the carrying value of those loans. Thus, our total impaired loan valuation allowance of $8.0 million
at December 31, 2010 is applicable to the remaining $39.0 million balance of impaired loans.

On impaired loans for which it is
anticipated that repayment will be provided from cash flows other than those generated solely by the disposition of underlying collateral, impairment is measured using the net present value of expected cash flows relative to the loans
remaining book balance. If a distressed borrower displays the desire and ability to continue paying on the loan, but is unable to do so except on a modified basis, an amended repayment plan may be negotiated. For these TDRs, the act of
modification in and of itself suggests that the Company believes the source of repayment will likely be from borrower cash flows, thus they are also typically evaluated for impairment by discounting projected cash flows.

For loans where repayment is expected to be provided solely by the underlying collateral, impairment is
measured using the fair value of the collateral. If the collateral value, net of the expected costs of disposition, is less than the loan balance, then a specific loss reserve is established for the amount of the collateral coverage shortfall. If
the discounted collateral value is greater than or equal to the loan balance, no specific loss reserve is established. At the time a collateral-dependent loan is designated as nonperforming, a new appraisal is ordered and typically received within
30 to 60 days if a recent appraisal was not already available. We generally use external appraisals to determine the fair value of the underlying collateral for nonperforming real estate loans, although the Companys licensed staff appraisers
may update older appraisals based on current market conditions and property value trends. Until an updated appraisal is received, the Company uses the existing appraisal to determine the amount of the specific loss allowance that may be required,
and adjusts the specific loss allowance, as necessary, once a new appraisal is received. Updated appraisals are generally ordered at least annually for collateral-dependent loans that remain impaired. Current appraisals were available for 67% of the
Companys impaired collateral-dependent loans at December 31, 2010, or 85% if appraisals ordered or received shortly after year-end are included. Furthermore, the Company analyzes collateral-dependent loans on at least a quarterly basis,
to determine if any portion of the recorded investment in such loans can be identified as uncollectible and would therefore constitute a confirmed loss. All amounts deemed to be uncollectible are promptly charged off against the Companys
allowance for loan and lease losses, with the loan then carried at the fair value of the collateral, as appraised, less estimated costs of disposition if such costs were not reflected in appraised values. Once a charge-off or write-down is recorded,
it will not be restored to the loan balance on the Companys accounting books.

Based on our detailed evaluation of individual
nonperforming real estate loans on our books at December 31, 2010, approximately $8.7 million in probable losses have been identified. An allowance was established for that amount, although losses totaling $4.3 million have been identified as
uncollectible and were written off against that allowance. After the aforementioned write-downs there is a $4.4 million allowance remaining for $20.3 million in nonperforming real estate loans as of December 31, 2010, with another $18.6 million
in nonperforming real estate loans requiring no allowance because the fair value of the collateral or net present value of expected cash flows exceeds the book value of the loans. The loss allowance established for specifically identified probable
losses for other nonperforming loan categories, including commercial loans and leases, SBA loans, and consumer loans, totaled $2.7 million on loan balances of $7.1 million at December 31, 2010.

Our methodology also provides that an allowance be established for probable incurred losses inherent in performing loans and leases, which are segregated
by loan grade and then evaluated either individually or in pools with common characteristics. At the present time, pools are based on the same segmentation of loan types presented in our regulatory filings. While this methodology utilizes historical
data, projected cash flows and other objective information, the classification of loans and the establishment of the allowance for loan and lease losses are both to some extent based on managements judgment and experience. Our methodology
incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan and lease losses that management believes is appropriate at each reporting date. Quantitative information includes our historical
loss experience, delinquency and charge-off trends, current collateral values, and the anticipated timing of collection of principal for certain impaired loans. Qualitative factors include the general economic environment in our markets and, in
particular, the state of the agricultural industry and other key industries in the Central San Joaquin Valley. Lending policies and procedures (including underwriting standards), the experience and abilities of lending staff, the quality of loan
review, credit concentrations (by geography, loan type, industry and collateral type), the rate of loan portfolio growth, and changes in legal or regulatory requirements are additional factors that are considered. The allowance established for
probable incurred losses for performing loans was $14.0 million at December 31, 2010.

There have been no recent material changes to the
methodology used to determine our allowance for loan and lease losses, although historical loss rates have increased substantially over the past couple of years. As we add new products and expand our geographic coverage, and as the economic
environment changes, we expect to enhance our methodology to keep pace with the size and complexity of the loan and lease portfolio and respond to external pressures. We engage outside firms on a regular basis to assess our methodology and perform
independent credit reviews of our loan and lease portfolio. In addition, the Companys external auditors, the FDIC, and the California DFI review the allowance for loan and lease losses as an integral part of their audit and examination
processes.

Management believes that the current methodology is appropriate given our size and level of complexity. The table that follows summarizes the activity in the allowance for loan and lease losses
for the periods indicated:

The Companys provision for loan and lease losses fell by $4.9 million, or 23%, in 2010 relative to
2009. On the surface, the decline in our loan loss provision appears directionally inconsistent with net charge-offs, which increased $6.3 million, or 49%, for the comparative periods. However, as previously discussed, many of the loan charge-offs
were against specific reserves that had been established in prior periods and thus did not create the need for reserve replenishment. Real estate loan charge-offs experienced the largest increase among our principal loan categories, rising by $5.2
million, or 95%, for the comparative periods, due mainly to write-downs subsequent to the determination that certain balan